The global petrodollar system: Born in 1974, will it collapse in 2026?

In the past few weeks, this round of US-Iran conflict can be said to have had a profound impact on the global financial markets. However, due to the fact that the US dollar index has almost broken 100 in sync with oil prices, the impact of this geopolitical crisis on the global oil-dollar system has been relatively less discussed. As the conflict enters the fourth week and the Strait of Hormuz remains blocked for a long time, finally a large investment bank noticed this on Tuesday... Deutsche Bank strategist Mallika Sachdeva pointed out in the latest research report that the long-term impact of the Iran conflict on the US dollar may lie in its test of the foundation of the oil-dollar system. If further cracks are exposed, the use of the dollar in global trade and savings, as well as the dollar's position as a global reserve currency, may face significant chain impacts! The report stated that the reason why the world holds reserves in dollars is largely due to the fact that global transactions are conducted in dollars. The dominance of the dollar in cross-border trade is dependent on the oil-dollar system - global oil trades are priced and settled in dollars. This arrangement can be traced back to the relevant agreements in 1974: Saudi Arabia agreed to price oil in dollars and invest surplus funds in dollar assets in exchange for US security. As oil is a core input in global manufacturing and transportation, the global value chain naturally tends towards dollarization, and global surpluses accumulate in dollars. However, even before the outbreak of this conflict, the foundation of the oil-dollar system was already under pressure. Middle Eastern oil now mainly goes to Asia, not the United States; sanctioned Russia and Iran have long since left the dollar system for oil trading; Saudi Arabia is pursuing defense autonomy and exploring non-dollar payment infrastructure like mBridge (multilateral central bank digital currency bridge). Deutsche Bank believes that this conflict may further expose cracks in the system: the security protection of Gulf region infrastructure by the United States, as well as the maritime security of global oil trade, are both challenged. Economic losses in the Gulf region may prompt them to reduce their dollar-denominated foreign asset savings. This conflict may be a key catalyst for weakening the dominance of the oil-dollar. The greater risk is: if the world gradually moves away from oil and gas trade towards more resilient sources of energy - including domestic fuel, renewable energy, and nuclear power. The move away from oil itself, along with the push to price oil in other currencies, will have equally significant implications. A world that is more self-sufficient in defense and energy will also be a world that holds fewer dollar reserves. The strategic importance of the Middle East as a dollar reserve currency cannot be underestimated. The current conflict may well be the perfect storm for the oil-dollar. This round of US-Iran conflict has shaken the core foundation of the oil-dollar Deutsche Bank pointed out that this conflict fundamentally shook the core agreement of "security in exchange for oil-dollar pricing": - US military assets and bases in the Gulf were attacked, while the oil infrastructure in the Gulf countries was damaged. - The US ability to secure the global circulation of oil raises questions due to the blockage of the Strait of Hormuz. - The US security protection system is under fundamental scrutiny. For the long term, if global oil consumption declines, Gulf countries significantly deplete their dollar savings, Gulf countries have closer economic and trade ties with Asia, and there is a gradual reduction in oil-dollar pricing, the use of the dollar in global trade and savings will face significant chain impacts. Risks in the oil-dollar system have been increasing before and after the conflict Deutsche Bank pointed out that before the US-Iran conflict broke out, the foundation of the oil-dollar had already undergone multiple changes: - The US is no longer the largest buyer of Middle Eastern oil: the shale revolution has made the US energy independent, Saudi oil exports to China are more than four times those to the US, and 85% of Middle Eastern oil flows to Asia; China's willingness to settle in RMB is becoming increasingly clear. - Saudi Arabia is promoting defense autonomy: under the "2030 Vision," Saudi aims to increase the proportion of domestic defense expenditures to 50% and reduce reliance on foreign weapons. - Saudi Arabia joins mBridge and signs currency swaps with China: mBridge, initiated by the Chinese central bank, Hong Kong Monetary Authority, Thai central bank, UAE central bank, and Saudi central bank, uses blockchain to facilitate cross-border payments for central bank digital currencies without relying on dollar agents and SWIFT, and has reached a preliminary operational stage, a non-dollar payment channel has been established. - Sanctions on Russia and Iran are pushing oil trade to de-dollarize: Russia and Iran have already settled oil sales using rubles, yuan, rupees, and other domestic currencies, moving away from the dollar system. And this round of conflict has brought new instability factors to the oil-dollar: - The US security protection is being tested: US military bases, oil fields and infrastructure in the Gulf have been attacked, and conflicts caused by US military actions are putting traditional allies (Europe, Japan, South Korea, etc.) at greater risk due to the Strait of Hormuz. - Bilateral diplomacy replaces US-led maritime security: navigation in the Strait of Hormuz relies on bilateral diplomatic negotiations, with some oil tankers bound for China, India, and Japan obtaining permits to pass through, highlighting the critical role of bilateral relations. Long-term risks: global acceleration of energy transformation Deutsche Bank points out that the current situation is highly reminiscent of the 1970s: since 2020, there has been a second major oil and gas shock (2022 Russia-Ukraine conflict + current US-Iran conflict). If Gulf production facilities are severely damaged, oil prices may remain structurally high after the conflict ends; the "weaponization" of the strait will inject risk premiums into maritime energy transport. Even if oil prices fall, increasing energy self-sufficiency and resilience to domestic energy interests are crucial. Looking back at history, the Arab oil embargo in 1973 led to significant improvements in energy efficiency, energy diversification, and reserve construction in the West, accelerating the development of oil and gas in Canada, the Gulf of Mexico, Alaska, and the North Sea, reducing dependence on Middle Eastern oil in OECD countries; it also led to the establishment of strategic oil reserves and created political will for early investment in renewable energy and nuclear power. Currently, energy-dependent regions (Europe, Asia, the global South) face three core paths: - Increased development of domestic fossil fuels: countries like the UK and Brazil are accelerating domestic oil and gas exploration, Europe and some Asian countries are restarting domestic coal mining. Even if they do not move away from fossil fuels, global oil and gas trade volumes may decline, which is crucial for the foreign exchange landscape. - Expansion of renewable energy: supported by Chinese capacity, renewable energy costs are much lower than in the 1970s; China accounts for 80% of global CECEP Solar Energy panels, 70% of wind turbines, and 70% of lithium batteries, giving it a supply advantage, which may accelerate the transformation of the global Southern economies, but also brings new dependencies on single industrial countries. - Development of nuclear power: traditional US allies like Europe and Japan are significantly increasing nuclear power, truly achieving energy independence. Nuclear power, like defense construction, has a long cycle but has far-reaching impact on the foreign exchange landscape. Deutsche Bank points out that if the world moves away from cross-border oil and gas trading and towards domestic fuel, renewable energy, and nuclear power, the most direct long-term impact will be: narrowing the oil and gas trade deficit in Europe and Northeast Asia, reducing energy surpluses in the Middle East; shrinking global oil trade will create greater space for non-dollar trade pricing. Moving away from oil itself and the impact of pushing oil pricing in non-dollar denominated currencies will also be significant - the two pillars of the oil-dollar system, "oil" and "dollar," will be under pressure simultaneously. Conclusion Short-term: US energy independence brings some hedging premium for the dollar, as the US is the only major economy that is energy independent and far from the battlefield. However, factors such as fiscal risks brought about by US military expansion and Asian and Middle Eastern countries reducing their holdings of US debt for exchange rate stability offset the short-term benefits, and the dollar did not significantly strengthen in the crisis. Long-term: The crisis has a deeper and more enduring impact on the dollar, as it undermines the core foundation of global trade priced in dollars and surpluses held in dollar assets. The strategic importance of the Middle East as a dollar reserve currency cannot be underestimated. The current conflict is the perfect storm for the oil-dollar. This article is reprinted from "CaiLian News". Edited by GMTEight: Jiang Yuanhua.