The Yuan and Oil
Investors and speculators around the world are considering how the global oil price and the price of gasoline at the pumps can be increasing in the face of rising global oil inventories and no increase in demand for anything in the US.
The reason for this dates back to the 70’s when the OPEC nations formed and initiated an embargo, while pegging the oil prices against the US dollar, to make up for losses incurred when the US went off the gold standard.
In order to maintain the oil price peg China must print large amounts of money to purchase oil and US dollars driving the price up. This has had the effect of flooding the Chinese banking system with capital, which has gone into new lending by banks, the stock market and hard assets like oil, driving up growth and prices in an otherwise contracting global economy. Maintaining the peg is hard on the Chinese economy. If/when something breaks, what will that mean for the price of oil? It should be good for those who invest in oil, if the thing that breaks is the peg.
By Daniel Araujo
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