Why is the half-century-old "Petrodollar" hegemon now collapsing from its foundation?

Ask AI · How the Middle East conflict exposes the fragility of oil-dollar security contracts?

Reporter: Lan Suying · Editor: Wang Jiaqi

With a conflict breaking out between the United States and Iran involving Israel, the U.S. dollar is once again in the spotlight. As the main pricing and trading currency for crude oil, the U.S. dollar seems to have more safe-haven appeal than gold.

However, after this round of conflict erupted, the U.S. Dollar Index surged rapidly to the 100-point mark within the first two weeks, then lost momentum to keep rising, and is still currently in a low-range area since April 2022.

The U.S. Dollar Index’ 5-year trend

At this point, the market began to doubt: not only can this war not rescue U.S. dollar hegemony, it may instead signal that the hegemony is heading toward a “sunset.”

Could the “petrodollar” system created during the Middle East crisis in the 1970s end in this Middle East crisis?

Security promises turn into empty talk: without a stable Middle East, there is no stable “petrodollar”

To understand the “petrodollar,” you must trace back to the 1974 agreement that changed the global monetary landscape.

At the time, the United States reached a “rock-solid” agreement with Saudi Arabia: the U.S. would provide military protection to the oil-producing countries in the Gulf. In return, Saudi Arabia pledged to conduct oil trade using the U.S. dollar as the only pricing and settlement tool, while channeling massive petrodollar surpluses into buying U.S. Treasury bonds, propping up the credit of the dollar/U.S. Treasuries.

In the decades that followed, other members of the Gulf Cooperation Council all followed suit, thereby establishing the “petrodollar” closed loop. The core logic of this system is: security in exchange for pricing power.

Yet, in this conflict, the fragility of this contract has been exposed beyond doubt.

After U.S. and Israeli airstrikes in Iran, targeting the world’s largest natural gas field—the South Pars field—Xinhua News Agency reported, Iran immediately launched attacks on the world’s largest liquefied natural gas production facility located in Ras Laffan, Qatar, and struck key energy infrastructure in Saudi Arabia, Kuwait, and the United Arab Arab Emirates. Qatar said the Iranian strikes affected Qatar’s liquefied natural gas export capacity by 17%, and are estimated to cause an annual revenue loss of about $20 billion.

Once the security pledge made by the United States turns completely into empty talk, the foundation of the “petrodollar” begins to shake. Former Goldman Sachs economist and former UK Treasury minister Jim O’Neill wrote in an article: “This conflict has proven that siding with the United States and forming alliances can no longer buy tangible national security guarantees.”

And now, the U.S. is caught in a bind. In an article titled “The U.S.-Iran conflict: the petrodollar’s sunset,” a Western Securities analyst said that if the United States unilaterally announces a withdrawal from the conflict, the military protection it provides to Gulf states would be disproven.

Collin Anderson, assistant professor in the Department of Political Science at the State University of New York at Buffalo, emphasized in an interview with the reporter of the Daily Economic News (referred to as the “Daily Economic News reporter”) that to stabilize the “petrodollar” system, it is necessary first to restore stability and security to the Strait of Hormuz. In addition, Halk Island deep in the Persian Gulf is Iran’s main long-distance oil processing facility, and its situation is equally crucial. Without addressing these two issues first, no plan can stabilize the system.

He warned that since the “petrodollar” system was established, it has never faced such dense, ongoing chain crises. At present, the disruption of navigation appears to be a short-term event, but it could very likely evolve into a long-term blockade. With no sign of de-escalation in the Iran conflict and no short-term possibility of the Strait of Hormuz returning to normal, the situation is continuing to worsen in the direction of long-term blockage.

According to China Central Television (CCTV) News, on March 25, Iran said that ships from non-belligerent countries can pass through the Strait of Hormuz safely, but the strait is still closed to the United States and Israel.

Kpler’s trade risk analyst Ana Subasic said: “We have not yet seen any material rebound in the scale of navigation.” Data from Kpler’s ship tracking platform Marine Traffic shows that, within the seven days up to March 25, a total of 28 ships crossed this narrow waterway (including ships with disabled transponders and vessels sailing covertly); whereas in the week before March 18, there were only 20 ships.

S&P Global Market Intelligence data estimates that currently about 3,000 ships are standing by in the surrounding areas waiting to pass through. Under normal circumstances, about 120 ships pass through the strait per day.

Number of ships passing through the Strait of Hormuz in March 2026: orange indicates ships attempting to avoid detection, yellow indicates sanctioned ships, and black indicates other ships

In a recent report titled What Iran means for the dollar: a perfect storm for the petrodollar, Deutsche Bank strategist Mallika Sachdeva emphasized that among the “petrodollar” system’s three major core pillars, the breaking of the security alliance relationship is the most lethal link that crushes the system.

Middle East 85% of crude oil is sold to Asia—petroleum trade accelerates away from the U.S. dollar

The U.S.’ demand for Middle East oil and oil priced in U.S. dollars are the other two major pillars of the “petrodollar.”

But Deutsche Bank’s data shows that since 2019, the United States has transitioned into a net energy exporter. Currently, 85% of Middle East crude oil is sold to Asia, and Saudi Arabia’s crude oil exports to China are more than four times its exports to the U.S.

Image source: International Energy Agency

The rise of emerging consumer powers such as China and India has significantly shifted the center of gravity of oil trade eastward. To hedge risks from U.S. dollar exchange rate fluctuations, Asian buyers are more inclined to push for settlement in their own currencies. Jim O’Neill said, “The economic opportunities brought by Asia are becoming more and more attractive day by day.”

A set of data revealed by Zhang Yidong, chief economist at Haitong International Securities, is highly persuasive: three months ago, the share of renminbi-denominated pricing in oil Saudi Arabia exported to China was less than 20%; as of the end of March 2026, it had risen to 40%. In just three months it doubled, which shows that oil-producing countries are ‘voting with their feet’ using real actions.

Deutsche Bank’s report says that Russia and Iran’s oil sales have adopted multiple local-currency pricing and trading approaches, such as in rubles and renminbi. Saudi Arabia is trying non-U.S.-dollar payment infrastructure such as mBridge (a multilateral central bank digital currency bridge).

The report also points out that this conflict may become a catalyst for weakening the dominant position of the “petrodollar” and getting oil renminbi off the ground.

Changes in the global foreign exchange reserve structure also confirm the trend of ongoing weakening demand for the U.S. dollar.

IMF-compiled data on the composition of official foreign exchange reserves (COFER) shows that, as of the third quarter of 2025, the total value of global foreign exchange reserves was $13 trillion, with the U.S. dollar accounting for 56.92%, down slightly from 57.08% in the previous quarter.

Global restart of nuclear power and push for renewables—oil-currency anchor status is shaken

Without oil’s “monopoly” position in the global energy structure, there would be no “petrodollar.” And now, oil’s position is being challenged by the world’s energy diversification transition.

Deutsche Bank said that in the face of an energy supply crisis caused by the blockade of the Strait of Hormuz, traditional energy-importing countries such as Europe, Japan, and South Korea are increasingly viewing nuclear energy as a core path to achieve energy independence, accelerating their efforts to break away from reliance on Gulf oil.

For example, French Prime Minister Sébastien Lecornu recently said that France is vigorously advancing the construction of six new-generation EPR2 reactors and is also assessing eight additional projects. At the same time, France will invest and develop new areas at sea in offshore wind power, photovoltaics, geothermal energy, and other fields. Belgium is working to extend the operating lifetimes of existing reactors. Italy is drafting legislation to lift its nuclear ban. Japan’s energy policy has also shifted from “getting away from nuclear power dependence” to “making maximum use of it.”

Gulf oil-producing countries themselves are also accelerating energy transitions. In its 2030 Vision, Saudi Arabia has clearly set the goal of having renewable energy account for 50% of energy production by 2030, mainly through large-scale investments in wind and solar projects, to reduce the economy’s dependence on oil exports. And the development of renewables will reduce its demand for the “petrodollar” to flow back.

Leveraging the world’s most complete new-energy industry chain, leading technology, and cost advantages, China is deeply reshaping the global energy landscape. China produces 80% of the world’s solar panels, 60% of wind turbines, and 70% of lithium batteries.

With international oil prices continuing to run at high levels, the cost gap between new energy and traditional fossil energy is further widening, forcing the world’s energy transition to speed up across the board.

Deutsche Bank issued a warning that if the world accelerates away from fossil fuels and fully turns to new energy and nuclear power, it will directly lead to a contraction in global oil trade volumes. The impact on the “petrodollar” system is no less than the pressure caused by non-U.S.-dollar settlement.

Collin Anderson told the Daily Economic News reporter candidly: “In the future, the global monetary system will most likely move toward fragmentation. Different entities, such as Europe, Russia, and the United States, may each build regional settlement systems based on the euro, the ruble, and the dollar, until a new global monetary hegemony takes shape, but the time horizon for this process is hard to predict.”

In addition, misjudging the situation could bring the United States into a fiscal crisis, an economic crisis, and even a credit crisis.

A Western Securities analyst said in a report that Trump could have hoped that after leadership inside Iran was hit and suppressed, Iran would fall into chaos. But this did not happen, creating the risk that the U.S. could be dragged into a prolonged war quagmire. This means the U.S. would either cut other spending, or run even larger deficits and issue more U.S. Treasuries, which could further trigger economic and financial crises. Therefore, regardless of whether the United States chooses to continue the war, it could lead to further widening of fissures in U.S. dollar credit.

In conclusion, Collin Anderson said, “The biggest pressure facing the ‘petrodollar’ system right now comes from the unstable signals released by Trump.” This has also given unprecedented momentum to countries to push for diversified reforms to reduce reliance on the “petrodollar.” In his view, the current crisis can be considered the most severe challenge the ‘petrodollar’ system has faced since the 1970s.

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