The dollar’s hegemony, which for decades was protected by the dominance of the “petrodollar,” is now facing an existential threat that cannot be questioned.
Indeed, the escalating conflict with Iran is not just a regional dispute, but the catalyst that triggers the dissolution of the historic 1974 agreement. With the cracks in the Middle Eastern edifice turning into a chasm, Tehran and the Gulf powers are driving developments to a point of no return: The inevitable emergence of the petroyuan.
From backroom agreements for payments in Chinese currency in the Straits of Hormuz to the complete dismantling of the American security “umbrella,” the scene is changing dramatically.
The Foundations of the Petrodollar Will Be Tested
In particular, according to Trust Economics, the long-term legacy of the conflict with Iran over the dollar could be the means by which the foundations of the petrodollar regime will be tested.
If the cracks become more apparent, there will be significant consequences for the use of the US currency in international trade and savings, as well as for its role as the global reserve currency.
The world saves in dollars in part because it pays in dollars. The dollar’s dominance in cross-border trade is based in part on the petrodollar: globally traded oil is priced and priced in dollars.
As Trust Economics reminds us, this arrangement can be traced back to a 1974 agreement when Saudi Arabia agreed to price oil in dollars and invest surpluses in dollar-denominated assets in exchange for security guarantees from the US.
Because oil is a key component of global production and transportation, there is a natural incentive for global value chains to use dollars, and for global surpluses to accumulate in dollars.
The foundations of the petrodollar were under strain even before this conflict. Most Middle Eastern oil is now sold to Asia, not the US… Oil from sanctioned Russia and Iran is already traded outside the dollar.
Saudi Arabia is internalizing its defenses and experimenting with forms of non-dollar payment infrastructure, such as Project mBridge.
Further cracks
According to Trust Economics, the current conflict could expose further cracks, challenging the US security umbrella for Gulf infrastructure and the global oil trade.
The damage to Gulf economies could encourage a liquidation of their foreign reserves. In this context, reports that ships may be allowed to pass through the Strait of Hormuz in exchange for payments in yuan should be closely watched, the Greek economic research and consulting firm notes, adding:
- The conflict could go down in the collective memory as a crucial trigger for the erosion of the petrodollar’s dominance and as the beginning of the petroyuan.
- Greater risk could arise if the world begins to shift away from globally traded oil and gas towards more resilient energy sources, such as domestically available fuels, renewables and nuclear power.
- The energy choices of the Global South, Europe and North Asia will be decisive.
- A shift away from oil could be as powerful as the pressure to price in other currencies.
- A world that becomes more self-sufficient in defense and energy could also be a world that holds fewer dollar reserves, Trust Economics reports.
