The gold standard may have ended in the early 1970s, but for the next 50 years it was quietly replaced by something else: oil. The so-called “petrodollar” system was poorly understood for much of this time, but a secret agreement between Henry Kissinger and Saudi Arabia ensured that the dollar remained the dominant reserve currency. The outbreak of war in Iran exposes America’s Achilles heel; China is positioning the “petroyuan” as a clear successor and, best of all, the Saudis quietly killed the petrodollar two years ago.
The U.S. and Israel’s war against Iran has shed light on the power of the “petrodollar” that forms the cornerstone of America’s dominance of global trade, but economists warn that the currency architecture has been fraying at its edges for years.
Analysts herald that the 2020s will be the biggest change in the world’s relations with the dollar since 1974, and every day the Iran war continues, the cracks in the old system grow larger. Of course, the dollar is still overwhelmingly dominant, but that’s no longer the only game in town.
Understanding this moment requires rewinding a bit to see how we got here.
In 1974, the United States negotiated an agreement with Saudi Arabia that the Gulf country accepted. sell oil only in US dollars. In return, the United States would provide military aid and security. The United States, then under President Richard Nixon, was seeking ways to secure global demand for the U.S. dollar following the end of the gold standard in 1971. Following the 1973 oil crisis, the United States was motivated to consolidate its oil supply chain.
Because oil was and remains so fundamental to nearly every industry, “petrodollars” became ubiquitous and the dollar became the cornerstone of the global economy: Oil-rich countries needed somewhere to put their growing dollar reserves and turned to U.S. Treasuries. Countries that bought oil did so in dollars.
This cycle created a currency architecture that largely supported the US dollar, which lasted for over 50 years. Saudi Arabia, as well as Qatar, Oman, Bahrain and the United Arab Emirates, require an estimated $800 billion in support reserves as a result of their currencies being pegged to the US dollar. Gulf Cooperation Council sovereign wealth funds More than 2 trillion dollars have been invested in US assets.
But the ongoing conflict in the Gulf has just exposed the weakness of the petrodollar. After the first US-Israeli attack, Iran effectively closed the Strait of Hormuz, through which 20 percent of global oil supply is traded. Industry experts said some ships were able to pass through the bottleneck By paying in Chinese yuan.
According to economists, Gulf countries have been quietly diversifying their trading partners for years before the current conflict, trading oil outside of the US dollar and thus, by definition, destroying the principle of the petrodollar as a single currency for oil trade. EBC Financial Group analyst Michael Harris wrote: Notes On Monday, it announced that the dollar’s share of global foreign exchange reserves has reached a 25-year low, falling from 71 percent in 1999 to about 57 percent today.
Signs show that the biggest winner of the de-dollarization drive is China. In 2024, Saudi Arabia did not officially renew its commitment to price oil only in dollars. The 1974 agreement is It is never a formal obligation Saudi Arabia is still making moves to diversify its trading partners, although its secretive nature leaves questions about whether it will lead to a policy change. In 2023, the Kingdom and China signed an agreement $7 billion currency swap agreement. The Central Bank of Saudi Arabia is in the same situation. Key participant in mBridge digital payment platform It allows direct exchange of money via blockchain.
“This shift reflects a fundamental economic reality,” Harris wrote. “China replaced the United States as Saudi Arabia’s largest oil customer. Economic gravity pointed to the yuan, and currency regulation pointed to the dollar.” The Saudis still deal largely in dollars, even with China, but the door is now open.
The petrodollar’s weakness had been quietly evident in the years before Saudi Arabia swapped currency with China. The United States was one of several countries to impose sanctions on Russia in the early 2010s following the annexation of Crimea. As a result, Russia began de-dollarizing the economyBy agreement with China Currency exchange worth 150 billion yuanor about $25 billion. Although Iran has been selling oil to China for decades, its relations strengthened after the United States reimposed sanctions in 2018 and 2019. China’s oil purchases now continue 90 percent of the oil exported by Iran.
“With the current war, there has been renewed attention to the fact that Iran has been selling most of its oil in yuan for years because it does not want to be tied to or aid the United States, and has been trying to avoid U.S. sanctions,” said David Wight, a historian at the University of North Carolina at Greensboro. Luck. “It’s trying to find a buyer, and that’s primarily China.”
German Bank Economists have warned that US and Israeli attacks on Iran will continue to strengthen ties with China, which will support the yuan to the detriment of the dollar.
Analysts said, “In this context, reports that ships may be allowed to pass through the Strait of Hormuz in exchange for oil payments in yuan should be followed closely.” a note to customers last month. “The conflict may be remembered as a key catalyst for the erosion of petrodollar dominance and the onset of the petroyuan.”
More generally, Wight said, the renewed interest in the petrodollar, as well as President Donald Trump’s persistent threats to redouble strikes against Iran, are signaling to other countries that the petrodollar may not be the currency of choice. According to one study, more than 90 percent of cross-border trade in the Americas is conducted through petrodollars. Report from Deutsche BankThis share falls to approximately 70% of commercial billing in Asia-Pacific and approximately 20% in Europe.
“This alone will not cause the entire system to collapse,” Wight said. “But I think the increasing aggression of the United States in many areas (both in terms of sanctions and war) is causing more countries to ask the question: ‘Do we want to be completely dependent on the dollar or do we want to be dependent on the dollar if things go bad for some reason?’”
China has positioned itself to benefit from any crack in confidence in the petrodollar, according to Fadhel Kaboub, an economics professor at Denison University and president of the Institute for Global Sustainable Prosperity. china consumes Approximately 15 million to 16.6 million barrels of oil per dayIt accounts for approximately 15% to 16% of the world’s total oil consumption.
China in 2018 Launched the Shanghai International Energy ExchangeIt is a subsidiary of the Shanghai Futures Exchange and provides international investors with a currency system other than the US petrodollar.
Kaboub said yuan trade “is not a geopolitical agreement” for Gulf countries Luck. “This is not a security agreement. This is just logical, common-sense business transactions. From the Chinese perspective, this is the building block of where China wants to be in 50 years.”
Kaboub said China was following the playbook of the United States, where the petrodollar was first strengthened by signaling to Gulf allied countries that it could provide a “safety umbrella” and currency alternative in times of geopolitical stress. But China has also invested heavily in renewable energy sources. almost four times the amount of operational electricity Compared to the USA, from solar energy; the realization that the world must maintain its economic dominance when it is no longer dependent on oil. The timing of the US comparatively is particularly important. struggles to maintain and repair outdated grid systemIt’s a situation that poses a threat to how quickly AI can scale its goals.
“They know they need to be an industrial and high-tech powerhouse that can impose its own currency and its own financial system on the rest of the world,” Kaboub said of China.
The fate of the petrodollar is at a crossroads during the Iran war. Kaboub suggested that “this could be a big turning point” if Iran can maintain its resilience against US and Israeli forces. Iran is a relatively small country, and by retaining control of the Strait of Hormuz, it could signal to other countries a viable currency architecture other than the petrodollar. Conversely, if the United States gains control of the Strait of Hormuz, the petrodollar will likely retain its dominance. On Tuesday, Trump threatened to attack Iran’s key power plants and infrastructure. Death of “an entire civilization” Unless Iran reopens the shipping channel.
Of course, despite the cracks in the petrodollar’s foundation, the currency is still far from insignificant.
“I’m not going to say the petrodollar is dead because that’s wrong,” Kaboub said. “It still overwhelmingly dominates international transactions. I’m not going to say there is something called the Petroyuan, which is an emerging superpower. It’s not there yet.”
“It is there as a potential alternative, but it has a long way to go to position itself as a dominant alternative to the dollar,” he concluded.
This story first appeared on: Fortune.com
