There is really no such thing as "petrodollars"; what the dollar fears most is actually this

Why is the petrodollar only a temporary lifeline for dollar hegemony?

Petroleum has never been the foundation of dollar dominance.

#01

The logic of “petrodollars” cannot withstand scrutiny

As tensions with Iran escalate again, many essays claim that Iran will settle in yuan, and the foundation of the petrodollar (Petrodollar) dollar hegemony will collapse.

If you have been paying long-term attention to global political and economic trends, you will be familiar with the term “petrodollar,” which aligns with common intuition: because the world needs oil, and oil must be bought with dollars, dollar hegemony is etched on black gold.

Following this logic, as soon as oil-producing countries start trying to settle in their own currencies, the structure of the dollar seems to be on the verge of collapsing instantly.

But if you are an economist or a scholar, you will find that the term “petrodollar” has appeared less and less in serious articles over the past decade because this term is outdated and more representative of “conspiracy theories.”

Instead of reading essays, look at financial data, and you will find:

The global annual oil trade volume is about 2-3 trillion USD, the total global trade volume is about 30 trillion USD, and the daily trading volume of the foreign exchange market exceeds 7 trillion USD — this is the key point: the annual oil trade volume is only a few hours of trading in the foreign exchange market.

Because I can only buy oil with dollars (in fact, this reason is no longer valid; China can buy crude oil from Saudi Arabia with yuan), I have to convert foreign exchange reserves hundreds of times larger than oil demand into dollars — this logic simply cannot withstand scrutiny.

Of course, the term “petrodollar” is not wrong, just outdated, because in the 1970s, it indeed saved the dollar’s life.

#02

In 1974, a “hostage exchange” agreement

In the early 1970s, the Bretton Woods system collapsed, and the dollar experienced an unprecedented credit collapse:

Countries around the world were frantically selling dollars and buying gold. U.S. gold reserves were running out, and Nixon announced the dollar’s decoupling from gold, meaning the dollar shifted from “quasi-gold” to “pure credit currency,” and after losing its gold anchor, the dollar’s purchasing power plummeted, plunging the economy into a stagflationary quagmire of stagnation and high inflation.

The dollar needed a new, globally accepted anchor, and oil, as the blood of industrial society, was a perfect substitute for gold. So the U.S. reached a key agreement with Saudi Arabia, and subsequent OPEC countries agreed to price their oil exports only in dollars.

To encourage Saudi Arabia to buy U.S. Treasury bonds with the dollars earned, the U.S. even set up a “backdoor” for Saudi Arabia, allowing it to bypass public bidding and directly purchase U.S. debt, gradually stabilizing the dollar’s credit.

Why did Middle Eastern countries help the U.S.? Actually, they were helping themselves.

After oil prices soared, oil-producing countries accumulated astronomical wealth in just a few years, bringing new troubles: if they settled in the currencies of importing countries, their inflation risk was extremely high at the time. If they demanded that trading partners use Middle Eastern currencies, they lacked the financial strength to do so. Looking at it all, although the dollar’s credit had declined, it was still the best choice.

So “saving the dollar” was not only America’s business but also the Middle Eastern oil producers’ business.

After Saudi Arabia, other members also found that converting oil revenues into dollar assets was the most liquid and efficient choice, helping stabilize their fiscal budgets.

More importantly, “oil for dollars” also saved global trade.

Oil-producing countries suddenly had hundreds of billions of dollars, while oil-importing countries faced severe local currency devaluation and foreign exchange shortages, which affected the liquidity of world trade. By letting Saudi Arabia buy U.S. debt with dollars, the dollar returned to the U.S. banking system, which then loaned to other countries to buy oil. This “circular system” kept global trade running smoothly and benefited all nations.

Moreover, “oil for dollars” was only part of the agreement. At that time, Middle Eastern countries also faced security issues, such as the Saudi royal family feeling highly insecure, external military pressure from Israel, and Soviet infiltration in the Arab region; internally, rising nationalism and threats from neighboring countries like Iraq and Iran.

The agreement also included U.S. promises to provide military protection to Saudi Arabia and ensure a military presence in the Persian Gulf, effectively buying “regime longevity” insurance for the royal family.

In addition, the U.S. promised to export technology and infrastructure capabilities to Saudi Arabia, from seawater desalination plants to urban power grids, with the modernization of Saudi Arabia largely supported by American technology.

Thus, “oil for dollars” was not just about trade and payments but also America using its financial, technological, and military strength to exchange for the “credit anchor” it held; and Saudi Arabia converting oil revenues into U.S. debt was essentially pledging its national wealth to the U.S.

The petrodollar was a lifeline for the dollar in the turbulent 1970s and was also a natural result of the absence of alternative currencies to replace the dollar at that time. But by the 1980s, as the U.S. economy and financial stability improved, the real foundation of dollar hegemony was established, and the role of the “petrodollar” diminished.

#03

The true foundation of dollar hegemony

Saudi oil only helped the dollar survive the crisis; what truly cemented its hegemonic position was the strength of the U.S. itself.

Starting from the exchange of Middle Eastern oil for dollars, what was actually exchanged was U.S. debt. Later, countries around the world discovered that the best vehicle for national wealth was still U.S. debt. Trillions of “idle funds” had no second market capable of absorbing and quickly returning them, nor could they generate interest elsewhere.

By the 1990s, the technological revolution erupted in the U.S., and top-tier technological output ensured that the world had to buy high-value-added products from America; investing in top companies meant buying U.S. stocks, all denominated in dollars.

This created a network effect: even when non-dollar countries trade with each other, they prefer using dollars — just like social media platforms, everyone uses dollars because everyone else is using them. Plus, the developed U.S. financial markets saved on currency conversion costs.

Therefore, dollar hegemony is the result of America’s technological, financial, and military comprehensive strength, with the petrodollar being the earliest “national app” embedded in the dollar operating system. Users can uninstall the app, but migrating an entire system deeply embedded in civilization’s foundation is nearly impossible and costly.

Oil is no longer important to the dollar. The U.S. has shifted from being the largest oil importer to an exporter, and the traditional path of importing Middle Eastern oil with dollars has already failed. Additionally, China, Russia, and Saudi Arabia are beginning to settle in their own currencies, greatly reducing the role of the dollar in oil trade.

Even if in the future, Middle Eastern oil can be traded in yuan or other currencies, it does not mean the dollar’s empire will collapse.

But I am not claiming the dollar’s position is forever unshakable. The core of a fiat currency’s value lies in trust, so threats to the dollar may not necessarily come from another sovereign currency but from widespread doubts about “centralized trust.”

#04

The real battlefield: decentralization

The recent strength of gold is not because of safe-haven demand but because the world is seeking a “stateless, decentralized” underlying asset — a vote of no confidence in the dollar’s role as a global public good. The first crack in the dollar empire appeared with the surge in gold prices, a point I elaborated on in my article “Will the surge in gold prices become another crack in the ‘Dollar Empire’?”

However, gold has its disadvantages; otherwise, it wouldn’t have been replaced by credit currencies like the British pound in modern times. Gold can only reflect a crisis of dollar trust but cannot replace the dollar itself.

The current dominance of the dollar relies on it controlling the “router” of global trade — the SWIFT system and “clearing banks”. The dollar’s credibility stems from the financial market and network effects among users. Even if U.S. power declines, countries are more likely to continue using it rather than switch to another sovereign currency.

Therefore, the real threat to the dollar is a decentralized “dimensionality reduction” attack, especially through cryptocurrencies. Using technology, code is law, and they can replace “trust relationships” by bypassing the dollar’s “router” with blockchain technology, enabling direct peer-to-peer real-time settlement in international trade, greatly improving efficiency.

More importantly, if future technological developments make cryptocurrencies more stable and wealth can be securely stored on decentralized networks, there will be no need to buy U.S. debt for “hedging.” This could bypass the U.S.’s most powerful financial weapon—sanctions—leading to “de-dollarization,” which would be a fatal blow to dollar hegemony.

Thus, cryptocurrencies threaten the dollar more directly than any other currency. The U.S. is most wary of this, and the current “killer” is the dollar’s "stablecoin"ization — injecting dollars into decentralized finance, transforming the dollar from “paper money” into “digital protocols.”

The U.S. hopes that if all decentralized trading platforms globally anchor to dollar stablecoins, decentralization will not kill the dollar but instead upgrade its hegemony to a “full digital” form.

In the future, the contest over sovereignty of stablecoins among nations will be the decisive arena of currency wars.

#05

Humans do not need “another dollar”

Fifty years ago, the dollar rebuilt its credibility on the ruins of the gold collapse through an “interest exchange” with oil.

The core of dollar hegemony lies in its ability to define a complete set of rules for wealth storage, liquidity, and trade payments, and to protect its operation. It was highly efficient in the first 50 years, but now it is clearly a “stumbling block” in the era of the internet and artificial intelligence.

So don’t think that the collapse of dollar trust means other currencies will have a chance. It’s precisely because the dollar system is so deeply rooted with various problems that humanity does not need “another dollar” but a whole new scheme.

The twilight of the petrodollar may well be the dawn of “decentralized currencies.”