Asia faces a dual impact of energy shortages and the appreciation of the US dollar, leading to a reassessment of the petrodollar system.

How will the re-examination of the petrodollar system affect global energy trade?

Some Asian countries are facing the dual economic pressure of soaring energy prices and a rising dollar.

According to Xinhua News Agency, the South Korean government entered “emergency mode” on March 25 to cope with the potential long-term energy crisis triggered by the situation in the Middle East. A report from Malayan Banking Berhad recently stated that the current tensions in the Middle East are impacting Asia through energy and supply chain channels, possibly creating a “stagflationary shock” for the ASEAN economy, dragging down growth and pushing up inflation. The report revised the overall economic growth forecast for the six major ASEAN economies, including Indonesia, Malaysia, the Philippines, Singapore, Vietnam, and Thailand, from 4.8% to 4.5% for 2026.

It is noteworthy that Asian countries, which are already vulnerable to disruptions in energy supply from the Persian Gulf, now face a concerning issue: the surge of the dollar is severely squeezing their own currencies.

Currently, 90% of global commodity transactions, including the skyrocketing prices of oil and natural gas, are settled in dollars. As the U.S. and Israel’s actions against Iran have thrown the world into turmoil, investors tend to withdraw from risk-prone regions and place their capital into U.S. assets, thus driving up the value of the dollar. This has made some Asian currencies weaker at a time when purchasing power is most needed.

Analysts believe that the governments and central banks of these countries must decide whether to change existing policies. Regardless of the outcome of the war, the current petrodollar system will be re-evaluated. The future role of the dollar will depend on whether the U.S. remains a reliable partner.

“Double the Pain”

In the 1970s, the U.S. and Saudi Arabia reached an agreement to settle oil trade in dollars. The petrodollar system is built on three pillars: U.S. demand for oil, oil priced in dollars, and the security relationship between the Gulf region and Washington.

After military strikes initiated by the U.S. and Israel, Iran cut off the transport of oil and gas through the Strait of Hormuz, leading to disruptions in global energy supply.

Although the U.S. has become a net exporter of energy due to the shale revolution, reducing its dependency on Middle Eastern oil, gasoline prices have risen to an average of $3.98 per gallon (approximately 3.78 liters), over $1 higher than before the war.

Brent crude oil is currently priced at about $100 per barrel, up from $70 a month ago. As Asian countries purchase large quantities of oil from the Middle East, the sudden reduction in supply and increased competition have driven up oil prices.

At the same time, investors have been pulling funds from high-risk areas and investing in U.S. assets, driving up the value of the dollar. Some Asian countries are facing currency weakness, causing them to spend more on imported goods, receive less from exports, and with investors shifting capital, the dollar-to-some-Asian-currencies exchange rates are nearing 20-year highs.

On the 23rd, U.S. President Trump announced a five-day delay in strikes against Iranian power plants and energy infrastructure. Hours earlier, India’s main stock index had fallen by 2.5%. Since the turmoil in the Middle East began, the index has dropped nearly 13%. These stock market losses have led to capital leaving India, resulting in a depreciation of the Indian rupee.

The Indian rupee has been depreciating over the past year, even as the dollar weakened against most currencies at that time. Currently, 1 dollar exchanges for 93.2 rupees, which is 8% higher than a year ago. Now, Indian buyers must pay 14,748 rupees to obtain the same amount of energy they could have purchased for 6,087 rupees before the war.

The exchange rate of the won to the dollar has fallen to its lowest level since the 2008 global financial crisis.

In recent days, the financial pressure on India and South Korea has eased somewhat, but deeper risks have already taken root.

On the 18th, the economic research organization IBON Foundation stated in a report that rising oil prices and the depreciation of the Philippine peso constitute a “double blow” that could lead to inflation rates doubling in the coming months, severely impacting millions of poor families.

On the 24th, Philippine President Marcos declared a national energy emergency. The Philippines relies on the Middle East for 90% of its oil imports. On the same day, the South Korean government urged the public to adopt energy-saving measures, as nearly 70% of the country’s crude oil is imported through the Strait of Hormuz.

Earlier this year, the Thai baht was performing better than the Indian rupee, but it has quickly fallen to a 10-month low, and as long as the war continues, the baht will decline. Thailand’s tourism and export industries usually benefit from a weaker baht. However, this time, the panic in the global travel market has led to a large number of canceled travel plans.

Harvard economist Kenneth Rogoff said, “When these countries’ exchange rates have already weakened and oil prices continue to rise, it doubles the pain.”

How Countries Respond

Asian countries are taking measures to respond, beginning to cut spending and make various adjustments to reallocate funds, such as requiring government employees to work from home and implementing fuel rationing.

Malayan Banking Berhad published a report on the 22nd stating that it is crucial to closely monitor “how authorities respond to rising fuel costs, as this could affect inflation expectations and currency stability.”

Even relatively wealthier Asian countries cannot protect their citizens from the impact if this tightening persists.

South Korean Finance Minister Kim Yun-chul warned on the 21st that expensive oil and a depreciating won would push up overall prices. Farmers in South Korea who need fuel to grow tomatoes, oranges, and sweet peppers in greenhouses have already begun to complain about rising fuel prices.

Nevertheless, Kim Yun-chul vowed to maintain price caps on gasoline, diesel, and heating oil, as these prices directly affect the lives of ordinary people. He also promised to freeze utility prices and subsidize certain consumer goods.

Indian Prime Minister Modi has been avoiding discussions about this crisis with his country’s parliament. It was not until the 22nd that he announced that the situation was serious but under control, stating that the Indian people would face the current challenges as they did with the COVID-19 pandemic.

Economist Jahangir Aziz from JPMorgan Chase in New York believes that for any country, “the question is, how do you plan to respond to this shock?” Governments and central banks must make decisions that will ultimately determine who is affected the most.

On one hand, a country’s central bank can choose to leave policies unchanged, allowing its currency to depreciate. This would make imported goods more expensive and export goods cheaper. Lower prices for export goods may benefit some local businesses, and workers who earn dollars abroad could send back more money, supporting the domestic economy.

However, rising prices for imported goods mean that consumers in that country will have to bear higher costs, which could lead to social instability or even government collapse. There have been precedents in Bangladesh, Sri Lanka, and Indonesia.

Aziz believes that when a government tries to protect its currency from the effects of a surging dollar, it faces a tough choice: “To achieve this, the only way is to tap into large foreign exchange reserves or raise interest rates.”

Aziz further stated that the crisis affecting countries today is markedly different from the 1997 Asian financial crisis, partly because lessons have been learned from that time. Exchange rates are now allowed to float, meaning that currency values fluctuate in sync with supply and demand. Countries have accumulated large reserves of dollars and other foreign assets for use in such times.

Will the Petrodollar System Be Shaken?

Reuters reported that regardless of the outcome of the war, Gulf countries will re-examine the petrodollar system and the hundreds of billions of dollars in reserves that support it.

Oil-exporting countries such as Saudi Arabia, the UAE, Qatar, Oman, and Bahrain have pegged their currencies to the dollar, which requires substantial foreign exchange reserves to support, estimated to be around $800 billion.

Additionally, it is estimated that the sovereign wealth funds of the Gulf Cooperation Council manage over $6 trillion in global investments, widely allocated to bonds, stocks, private equity, and heavily concentrated in U.S. assets.

Data from the U.S. Treasury Department shows that the funds from Saudi Arabia and the UAE rank among the top 20 holders of U.S. treasury bonds, with the total amount held by the two countries approaching $250 billion. Furthermore, tens of billions of dollars may also be stored in dollar deposit accounts in financial centers like London and other offshore havens.

Deutsche Bank analyst Marika Sachdeva believes that the petrodollar system was already under pressure before the war: most oil from the Middle East is now flowing to Asia; sanctioned Russian and Iranian oil is traded in non-dollar currencies; and Saudi Arabia has been promoting the localization of its defense industry and attempting non-dollar oil settlements. A report released by the bank on the fate of the petrodollar system on the 24th indicated that Saudi oil exports to China are four times those to the U.S.

This war may accelerate these trends, as Gulf countries face retaliatory strikes from Iran, weakening U.S. security guarantees and forcing the Gulf region to sell off dollar assets to offset economic losses.

Rogoff stated that the pressure faced by Asian countries this year could diminish the future appeal of the dollar, “Any factors that hinder global trade and lead to geopolitical fragmentation are detrimental to a currency that claims to dominate the world.” He believes that the future role of the dollar hinges on one question: “Can the U.S. still be a safe haven and a reliable partner?”

According to Reuters, if this war accelerates the global energy transition away from fossil fuels, the long-term impact on the petrodollar could be even more profound.

Deutsche Bank summarized in its report: “The immense strategic significance of the Middle East for the dollar’s status as the world’s reserve currency should not be underestimated. The current conflict may test the foundations of the petrodollar system.”

There are reports that if oil is priced in yuan, tankers may be allowed to pass through the currently largely blocked Strait of Hormuz. This is one of many clues that the market is closely monitoring and could have long-term implications. Regardless of whether the war ends soon, the flow of funds from Gulf investors now requires close attention.