China's Unquenchable Thirst For Oil Could Mean Big Changes For The Currency Markets

ReutersFor years, many have complained that China manipulates its currency, th renminbi (RMB), to keep it low against the U.S. dollar to make its goods more competitive in foreign markets.

But the U.S. energy production boom is bringing a sea change to the currency markets.

In September, China officially surpassed the U.S. as the world's largest oil importer in September - 6.30 million barrels a day versus America's 6.24 million. The IEA now says Chinese oil demand will grow 3.9% in 2014.

The AEI's Derek Scissors raises the prospect that China's role in oil markets becomes so great that oil trades start getting priced in RMB, at the expense of the greenback.

But: it would also mean China is finally forced to take its thumb off the currency scale:

Within a few years, China could not only pass the US for the lead, it could be far in front, as American shale production continues to rise. Will oil pricing then start to move to RMB? Only when the RMB is made fully convertible - a choice Beijing has struggled with for years. It may struggle for a good while longer, but when the decision is finally made, oil will give the RMB a strong claim to be a truly global currency.

Bank of America's David Woo has explained why the USD's decoupling from oil prices has been good for the economy: "[This] eases the inflation-growth trade-off in the U.S., thereby making U.S. assets more attractive."

Some might view this situation as a trade off - the Middle East's large dollar reserves, in theory if not always in practice, has been a de facto source of U.S. influence and political leverage there for decades.

But assuming the U.S. shale surge lasts and its secular decline in energy use is not a mirage, giving up U.S. dollar reserves in the Middle East may not seem like such a sacrifice.