The counter argument goes as follows: You do not need to be a major physical player to play a leading role in the global market. It all depends on how transactions flow over the globe — where they go and through which “universal” currency.

At the end of the day, it is physical presence, not conventional inertia, that wins great competitions. Victory for the present party may come a little late or a little early, but it always comes. No power could ever keep its status based merely on “the power of habits,”traditions, or temporarycommon culture.

Does this mean that China will end up controlling the global oil market? Does it mean that the petroyuan will seize the day? Not necessarily. It depends on internal Chinese stability, sustainability of this unique form of “oriental” development, resilience of its mode of evolution, and the vitality and flexibility of the system in the case of a crisis, which will inevitably occur at some point.

But if we fix those enormous variables, and say China can tackle these challenges, there should be no doubt that the petroyuan will win the day — or the decade or century — depending on the cohesiveness of the opposing camp and the direction of the global wind.

Why?

Let’s just consider the significance of the yuan-based oil transaction system in relation to another variable.

What will any oil producer do if he sells his oil for a bag of yuans? What can he buy with the yuan anyway? Cheap consumer products? This sort of merchandise can go only so far.

However, China is offering a different answer through the Shanghai Free Zone (SFZ). There, you can buy gold and pay in yuan, then export this gold, legally, as a metal, to anywhere. With gold, you can then buy anything, anywhere. Gold is still the currency of all currencies.

Yet, there is a major “catch” here. To explain it, let’s assume, once this road is opened, that oil would be sold only in gold, and not in any paper currency. What will happen then? That requires seeing the value — in dollars — of all the oil produced in the world versus the value — in dollars — of all the gold produced in the world. The comparison is stunning. There is 20 times more oil produced than gold. This means that oil prices, if oil is traded only in gold, would jump 20 times higher. Said differently, the dollar would be devalued to one-twentieth of its current value versus gold.

Whatever China does, therefore, would be a short-term mechanism. You cannot sell oil for dollars without disrupting the entire global financial system, including yuan-based transactions. Both the exchange value and the use value of oil is quasi stable, so far. The issue here is that this commodity, which is the principal reason why the dollar is the global reserve currency, is grossly undervalued if measured against the dollar.

Moreover, the introduction of a yuan-based oil transaction system, convertible into gold through the SFZ, would bring the conventional gold market to an end. This London-based gold market produces — on paper — the equivalent of the total world annual production of gold every four hours of any trading day.

If a producer sells oil, say, to the Europeans, and gets his money in Euros, why would he prefer to stay within that system if he can sell his oil in gold? It may seem like a simple question, but it is central in terms of calculating the consequences of the petroyuan and the allowance of exporting gold from SFZ.

It is obvious that the creation of a yuan-based system in oil payments will lead to the collapse of both the current dollar-based global financial system and the London-based global gold market system. It is an attack on a weak spot in the body of the global monetary system. And it is a weak spot because it was allowed to grow into a financial bubble since the second half of the 1970s.

Strategically speaking, the financial health of the global system requires more than a bandaid. A new deal with the main oil producers could work for a while, but not forever. Russia is now the top global producer and China is the topoil consumer— i.e. neither spots are occupied by the United States. Oil is the foundation of any future “global reserve currency.” As for the United States, it still imports between 3 and 3.5 million barrels per day of oil, if we measure production verses imports in net terms. Europe imports around 9 million bpd. Could the global financial system be kept there?

A balloon that is inflated with loans and expands via paper transactions will end up bursting. This is the law of physics and nature. It is also the law of theeconomy.

Will the petroyuan win, then? What the petroyuan will certainly do is reveal the nature of the bubble. Whether it can replace the current system it still a major “if.” Yet, this question should be replaced by a different one: Could the dominant Western global system remain in control? For how long? What lengths will it go to in order to preventits demise?