(Source: www.forbes.com)

This week Venezuela announced that it will no longer accept payment in U.S. dollars for its oil, a major divergence from typical oil market practices. It is said that Venezuela and its national oil company, PDVSA, will operate with euros. The given explanation is that this is an attempt to circumvent sanctions imposed by the U.S. government, but the real reason may be a sales pitch to China, India, and other large oil markets, that Venezuela hopes to attract as customers.

Almost all transactions in the global oil industry are made using the dollar, maintaining a stable gauge for pricing. Oil producers, whether American or not, generally prefer the dollar as well, because it universally accepted for them to use in their own purchases. Moreover, the dollar is considered reliable because it is backed by the full faith and credit of the U.S. government. The only other regular, major oil transaction that occurs without U.S. Dollars in today’s market is sale of some crude by Russian firms to China.  In 2015, Russia agreed to sell crude to China for the yuan in order to placate a customer with other options, namely Saudi oil.

Russia’s largest competitor in the Chinese oil market is Saudi Arabia’s oil company, Saudi Aramco. Aramco, originally an American company before Saudi Arabia purchased it, has been selling its oil in U.S. dollars for decades, when it and most of the industry switched from the British pound. Saudi Arabia’s economy is so intertwined with the oil business and the sale of oil for Dollars that the Saudi riyal is actually pegged to the dollar. Saudi Arabia also maintains tens of billions of Dollars of foreign currency reserves, the bulk of which is believed to be in U.S. dollars due to oil revenue. Saudi Arabia depends on oil revenue and the dollar value, so Russia agreed to incentivize China by accepting payment in yuan.

As a result, Russia takes in billions of yuan. Russia can either exchange that currency at a cost or spend it. Since Russia prefers not to pay for currency exchange of billions of yuan, the best option is to spend it on Chinese goods and services.

Venezuela currently sells the majority of its oil to the United States market, but this makes it vulnerable to further sanctions. By becoming agreeable to diverse currencies, Venezuela hopes to attract countries like China, India or others to purchase Venezuelan crude . These countries—and businesses in these countries—would much prefer to pay in their own currencies so that they are not required to hold onto dollar reserves or convert to the dollar at a cost.

However, it is a risk for Venezuela to sell oil in any currency other than the dollar or maybe the euro or the British pound. The regime of President Maduro, the quasi-dictator of Venezuela, needs cash to purchase food for its starving people, must pay to keep its oil industry running, and must pay the police and military forces that maintain the Maduro regime’s power. These goods and services cannot be bought with Indian rupees or with Chinese yuan.

More Info: www.forbes.com

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