In the early 1970s, the gold-based monetary system collapsed, but over the next five decades it was quietly replaced by a new structure centered on oil, giving rise to what is known as the petrodollar system. Although this system remained unclear to the general public for a long time, the dominance of the U.S. dollar as the world’s primary reserve currency was largely secured through a strategic understanding between Henry Kissinger and Saudi Arabia. However, the ongoing tensions surrounding Iran have exposed the system’s underlying vulnerabilities. On one side is the rise of China’s petro-yuan, and on the other, Saudi Arabia’s quiet move away from its long-standing arrangement—together signaling significant cracks in the dollar’s dominance.
While U.S. and Israeli military actions have once again drawn attention to the dollar’s central role in global trade, economists argue that the system has been weakening internally for years. Many analysts believe that the current decade marks the most critical turning point for the dollar since 1974. As the Iran conflict continues, the fractures in the old system are becoming more visible. Although the dollar still holds a strong position in global markets, it is no longer unchallenged.
Looking back, in 1974 the United States reached an understanding with Saudi Arabia under which oil would be sold exclusively in dollars, in exchange for military support and security guarantees. After the collapse of the gold standard in 1971, Washington sought to maintain global demand for the dollar at any cost. Following the 1973 oil crisis, securing energy supply became a top priority. Since oil was—and remains—the backbone of nearly every industry, the petrodollar system quickly became dominant. Oil-producing countries began investing their dollar revenues in U.S. assets, particularly government securities, forcing other nations to use dollars to purchase oil.
This cycle created a powerful monetary structure that sustained U.S. dollar dominance for more than half a century. Gulf nations maintained large reserves to stabilize their currencies against the dollar and invested heavily in U.S. financial markets. However, recent tensions in the Persian Gulf—especially around the Strait of Hormuz, through which about 20 percent of global oil flows—have highlighted weaknesses in this system. In some cases, transactions are now being conducted in alternative currencies.
Economists note that Gulf countries had already begun diversifying their trade partnerships well before the current crisis, gradually moving away from exclusive reliance on the dollar. Data shows that the dollar’s share of global foreign exchange reserves has declined, while China’s yuan is gaining ground as an alternative. Saudi Arabia, for instance, has taken steps toward diversification by engaging in currency swap agreements with China and participating in new financial platforms that allow direct currency exchanges.
At the same time, Russia began reducing its dependence on the dollar following U.S. sanctions, strengthening financial ties with China. Iran has also deepened its economic relationship with Beijing, with China now purchasing a significant portion of Iranian oil, often through non-dollar transactions. Analysts suggest that this trend could further weaken the dollar while strengthening the yuan.
However, the global system is unlikely to change overnight. The majority of international trade is still conducted in dollars. Yet increasing geopolitical tensions and the use of sanctions are pushing many countries to consider alternatives.
China, meanwhile, is pursuing a long-term strategy to strengthen its position. As one of the world’s largest energy consumers, it is leveraging its demand to promote the use of its currency in global markets. It is also building alternative trading systems and investing heavily in renewable energy to secure future economic dominance.
Overall, the current conflict represents a critical moment for the future of the petrodollar system. If Iran maintains its influence, it could accelerate the shift toward alternative financial structures. On the other hand, if the United States retains control over key strategic routes like the Strait of Hormuz, the dollar’s dominance may persist for some time.
That said, it would be premature to declare the end of the petrodollar. The dollar still dominates international transactions. At the same time, the yuan cannot yet be considered an equal rival. What is clear, however, is that a gradual transformation is underway in the global financial system—one in which the dollar remains powerful, but no longer unchallenged, as the yuan steadily emerges as a credible alternative.
Saudi Arabia ‘cancelled the petrodollar deal’ 2 years ago, then America started a war with Iran
