The gold standard may have ended in the early 1970s, but something else quietly took its place for the next 50 years: oil. The so-called “petrodollar” system wasn’t well understood for most of this time, but a secret deal between Henry Kissinger and Saudi Arabia ensured the dollar would remain the dominant reserve currency. The outbreak of war in Iran is exposing America’s Achilles’ heel, though, as China positions the “petroyuan” as the obvious successor, and to top it all off, the Saudis quietly killed the petrodollar two years ago.
U.S. and Israel’s war on Iran has put a spotlight on the strength of the “petrodollar,” which makes up the cornerstone of America’s dominance over global trade, but economists warn the currency architecture has been eroding at its edges for years now.
Analysts are heralding the 2020s as marking the biggest change in the world’s relationship to the dollar since 1974, and every day the Iran war continues, the cracks in the old system grow wider and wider. To be sure, the dollar is still overwhelmingly dominant, but it’s no longer the only game in town.
To understand this moment requires rewinding a bit to see how we got here.
Because oil was and is so fundamental to nearly every industry, the “petrodollar” became ubiquitous, and the dollar became the cornerstone of the global economy: Oil-rich countries needed a place to put their growing reserves of dollars and turned to U.S. Treasuries. Countries buying oil did so in greenbacks.
“This shift reflects a basic economic reality,” Harris wrote. “China displaced the United States as Saudi Arabia’s largest oil customer. The economic gravity pointed toward yuan while the currency arrangement pointed toward dollars.” The Saudis are largely still doing deals in dollars, even with China, but the door is now open.
“With the current war, there’s been renewed attention to the fact that Iran has, for years now, been selling much of its oil in the yuan because it doesn’t want to be tied to the United States or assisting it, and it’s trying to avoid U.S. sanctions,” David Wight, a historian at the University of North Carolina at Greensboro, told Fortune. “It’s trying to find purchasers, and that’s primarily China.”
“That, in and of itself, is not going to cause the whole system to collapse,” Wight said. “But I think that the increasing aggressiveness of the United States in multiple fields—both in terms of sanctions and in terms of warfare—has caused more countries to kind of wonder, ‘Do we want to be completely tied or dependent on the dollar if things go sour for whatever reason?’”
From the perspective of Gulf countries, trading in the yuan “is not a geopolitical deal,” Kaboub told Fortune. “This is not a security deal. This is just logical commonsense business transactions. From a Chinese perspective, this is the building block to where China wants to be in 50 years.”
“They know that they will 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.
To be sure, despite cracks in the petrodollar’s foundation, the currency is still far from becoming irrelevant.
“I’m not going to say that the petrodollar is dead, because that’s wrong,” Kaboub said. “It still overwhelmingly dominates international transactions. I’m not gonna say that there is a thing called the petroyuan that’s a rising superpower. It’s not there yet.
“It’s there as a potential alternative, but it‘s got a long way to go to position itself as a dominant alternative to the dollar,” he concluded.
