Behind the Smoke of the US-Israel-Iran War: Is the Petroleum Dollar System Collapsing?

Ask AI · How the U.S.-Israel-Iran conflict is accelerating the “petro-yuanization” of oil?

JieMian News intern reporter | Peng Tianmei

The U.S.-Israel-Iran war has entered its fourth week. As the risk of a prolonged blockade of the Strait of Hormuz becomes more entrenched, this geopolitical crisis’ impact on the global financial foundation is continuing to build and spread.

Former Goldman Sachs economist and U.K. Treasury Minister Jim O’Neill believes the war could draw the Gulf Cooperation Council countries closer together with China, India, and other major oil-consuming nations. Others also argue that the U.S.-Israel-Iran conflict will become a catalyst for “petro-yuanization.”

In the 1970s, as the United States reached agreements with major oil producers such as Saudi Arabia, oil pricing fully shifted to the U.S. dollar, and the petrodollar system was thus established. This mechanism forcibly requires oil-importing countries to hold ample U.S. dollars, laying the cornerstone for the U.S. dollar as the world’s core reserve currency.

This model not only injects a massive amount of capital into the United States through the “petrodollar recycling” channel—allowing it to sustain huge trade deficits over the long term—but also, driven by the hard necessity of global oil trade, creates a continuous and stable market demand for the dollar, thereby firmly consolidating its hegemony in the global financial system.

In recent years, the world has witnessed the power of financial sanctions. For oil-producing countries, avoiding the risks of a single currency is no longer just a political posture.

Data provided by Yan Jiantao, chief analyst at Jiechengt Energy, to JieMian News shows that the dollar’s dominant position in reserves and payments is experiencing a significant decline. According to International Monetary Fund (IMF) data, as of the third quarter of 2025, the dollar’s share in global foreign-exchange reserves was 56.92%, the lowest level in decades.

Yan Jiantao believes this loosening is being naturally accelerated by the U.S.-Israel-Iran conflict, because mutual demand between the United States and Middle East oil producers has dropped significantly, and technological innovations such as Bitcoin are also accelerating the weakening of this system from the ground up.

He also mentioned that if Iran’s current government survives the conflict, the “shadow fleet” that had previously been under sanctions may be able to trade more openly and lawfully. Since Iran’s crude oil exports basically flow to China and have long been outside the dollar system, this will undoubtedly further drive the penetration of the renminbi into real-economy trade.

Deutsche Bank strategist Mallika Sachdeva said in a Deutsche Bank podcast released on the 24th that countries tend to hold the currencies of those that might win in a military conflict, because winners won’t let their own debts depreciate. If the United States provides the maritime security capability that guarantees global oil flows, but that capability is fundamentally questioned because a strait is blocked, then the credibility of currency tightly linked to military power will inevitably be damaged.

In addition, Sprott’s latest report points out that, due to the interruption of energy revenues caused by the blockade of the Strait of Hormuz, the accumulation of foreign-exchange reserves in major oil producers such as the Gulf Cooperation Council (GCC) has stalled, and they may even be forced to use foreign-exchange reserves to fulfill fiscal obligations. This sharp drop in marginal demand means that gold and U.S. Treasuries are no longer natural destinations for petrodollar recycling; instead, they have become “cash-out tools” for institutions in the forced deleveraging process, severely weakening the feedback effect of high oil prices on the dollar system.

This shift marks a challenge to the real-world logic behind the dollar’s credit premium.

When energy exporters, instead of increasing holdings of U.S. Treasuries, prefer to hedge currency instability by holding tangible assets such as gold and energy, the demand premium for U.S. Treasuries will keep shrinking. This shift from debt credit to tangible reserves forces the United States to attract capital inflows with higher interest rates, thereby causing long-term erosion of the dollar’s intrinsic purchasing power.

Yan Jiantao explains from an asset-allocation perspective that market funds are rotating from gold into higher-return sectors such as oil, and that the Iran war has accelerated this conversion. Logically, higher oil prices raise inflation and lead to rate hikes, directly suppressing gold prices; however, this trend will not last forever. If high oil prices ultimately trigger an economic downturn and cause interest rates to fall, gold will rise again.

Therefore, the current volatility reflects the market’s dynamic equilibrium during a period of turmoil, not simply a depletion of liquidity. Global capital is continuously optimizing allocations across assets to chase higher returns. Oil prices moving higher increases oil’s appeal, which reflects the market’s self-balancing behavior under chaotic conditions.

Moreover, the underlying drivers of AI competition and the energy transition are also dismantling the petrodollar.

Oliver Harvey, head of currency research for Central and Eastern Europe and Latin America at Deutsche Bank, said in the podcast above that whether it is the U.S. threat of tariffs on Greenland or the recent blockade of the Strait of Hormuz, their common thread is that they both use economic leverage to strengthen political or diplomatic policy objectives. We have moved beyond a multipolar world that pursues efficiency; we have entered an era where economic policy is exercised as “hard power.”

Sachdeva believes that as AI is the frontier of growth, the essence of its competition is an energy race. The competition between the U.S. and China to secure cheap energy reserves fits perfectly with the logic of computational power hegemony.

Yan Jiantao also told JieMian News that deglobalization driven by the energy transition gives new energy a strong local character. China’s advantages across the new-energy industrial chain provide a real-economy trade foothold for renminbi internationalization.

Although the fractures between oil and the dollar described above are clearly visible, there is also a view that the collapse of the petrodollar system may not happen as quickly as the market imagines.

Chen Shouhai, director of the Oil and Gas Policy and Law Research Center at China University of Petroleum (Beijing), said in an interview with JieMian News that the case for judging that U.S. security and defense capabilities are damaged—and thereby cause an irreversible loosening of the foundation of contract credit—is not yet sufficiently supported.

Chen Shouhai told JieMian News that recent sustained pressure by the United States on countries such as Venezuela and Iran is, in essence, more like a coercive deterrence action taken to consolidate the petrodollar system and curb the trend toward de-dollarization. In his view, what Gulf oil producers feel in this context is more “deterrence” than a space for deviation; under external pressure, the credit foundation of the petrodollar actually shows even stronger rigidity constraints.

Chen Shouhai analyzed that continuing to use U.S. dollar settlement is still a low-cost political compromise, intended to avoid direct confrontation and prevent repeating the mistake of being comprehensively sanctioned. Before a force truly able to check and balance U.S. dollar hegemony forms, the vast majority of oil-producing countries find it difficult to fully abandon the dollar solely based on their own interests. At present, non-dollar settlement is more a “passive choice” by sanctioned countries rather than an “active replacement.”

Chen Shouhai also proposed that the petrodollar’s role as the “lubricant” of global economic liquidity has not failed, but it has weakened significantly. The core reason is that the petrodollar recycling mechanism has undergone structural changes.

Traditional petrodollar recycling has a highly closed-loop character: oil-producing countries export oil to receive dollars, then send large amounts of petrodollars back to the United States to buy financial assets such as U.S. Treasuries, directly replenishing U.S. and even global dollar liquidity, forming a smooth recycling cycle.

Under the current configuration, on the one hand, petrodollars are more often retained in offshore markets, allocated by sovereign wealth funds into global direct investment, real assets, and diversified financial products, with a clear decline in the scale and efficiency of recycling back to the United States. On the other hand, facing global inflation pressures driven by high oil prices, major economies generally adopt policy moves to tighten liquidity and curb inflation, further weakening the effect of high oil prices transmitting into dollar liquidity.

Together, these changes weaken the traditional link between high oil prices and dollar expansion, but this does not mean the petrodollar’s function has completely failed. Rather, its recycling routes, allocation structure, and transmission mechanisms have transformed, and the way global liquidity is generated and allocated has changed accordingly.