Strait of Hormuz crisis
accelerates petrodollar decline

For decades, the petrodollar has been the cornerstone of American global hegemony. By ensuring that the world’s most essential commodity, crude oil, was priced and traded exclusively in United States dollars, the U.S. secured a perpetual global demand for its currency. This arrangement allowed Washington to run significant deficits and wield sanctions as a tool for enforcing its foreign policy.

However, the events of the last four years, and especially the consequences of the ongoing Strait of Hormuz crisis, have transitioned the de-dollarization narrative from a theoretical risk to a structural realignment. The end of the dollar-based oil trade is no longer a thought experiment discussed in academic circles. It has become an operational reality driven by necessity security, and a fundamental reassessment of global risk and of the geopolitical power balance.

The pressures that led to this moment have been building for years, but they began in earnest with the expansion of the BRICS framework and the extensive financial sanctions imposed on Russia in 2022. When a major energy producer was cut off from the primary global clearing mechanism, the resulting shockwaves forced every other sovereign actor to reassess its own vulnerability. This led to the initial Sino-Russian attempts to reduce dollar dependence, which provided the technical and diplomatic blueprint for what we are seeing today.

While these early efforts were often dismissed as symbolic, they did show the world (especially the non-Western world) that international trade need not be exclusively tethered to the dollar. Even though the scale of these attempts was small, they did slowly but surely establish the alternative payment rails necessary to support large-scale commodity trade outside the Western sphere of influence.

From petrodollar dominance to the yuan oil trade

The outbreak of the Iran war in February 2026 served as the definitive catalyst amplifying these pressures to a boiling point. The crisis at the Strait of Hormuz did more than just spike global energy prices. It introduced a direct and unprecedented threat to the dollar’s role as the indispensable medium of exchange for oil trade.

A parallel framework for maritime commerce has emerged at this vital chokepoint. Iran has begun allowing a limited number of tankers from selected “friendly” countries to pass through the strait, provided that oil payments and up to $2 million in fees imposed by the Iranian leadership are settled either in Chinese yuan or in stablecoins. This is not merely a tactical maneuver in a localized war but a strategic strike against the petrodollar’s foundational logic. By tying physical safety and market access to a non-dollar currency, the current situation effectively demonstrates that the dollar is no longer the only currency for energy trading.

Naturally, the U.S. did not just concede defeat on this crucial point. President Donald Trump fought back, at least verbally. A ceasefire was established in early April and has held, despite occasional skirmishes. Subsequent high-level negotiations between the warring parties have continued despite repeated setbacks and delays. The American president made it clear to the world that “no one who pays an illegal toll will have safe passage on the high seas,” while also announcing a naval blockade of the Strait of Hormuz. He has since reiterated that the blockade will remain until a comprehensive deal is signed.

While the threat remains significant, enforcement has proven more robust than many initially expected. The U.S. has already conducted multiple armed boardings of suspect vessels and, in at least two documented cases in early May, fired on and disabled Iranian-flagged tankers attempting to breach the blockade. Recent actions have included intensified enforcement and strikes on Iranian assets. Experts note that the U.S. military has so far avoided firing missiles at large commercial tankers due to the risk of major environmental and diplomatic fallout. Instead, it has relied primarily on radio warnings, diversion orders and boarding parties.

Whatever avenue the U.S. chooses to enforce this blockade, it has proven difficult to execute without international support and would be challenging to sustain over the medium or long term. Nevertheless, the operation has already inflicted severe economic damage on Iran, redirecting hundreds of vessels and costing Tehran billions in lost revenue. While the so-called “Tehran Toll Booth” has been heavily disrupted, limited non-dollar settlements (particularly in yuan) continue in the vessels that successfully transit.

Implications for the U.S. and global economy

To fully appreciate the importance of the petrodollar system for the U.S., one needs to understand its essential role in the country’s economy.

A recent report from Deutsche Bank noted that the world predominantly saves in dollars because major transactions, especially commodities, are conducted in dollars. The American currency’s dominance in international trade is largely attributable to the petrodollar system: Globally traded oil is priced and settled in U.S. dollars. This arrangement dates back to a deal made in 1974, in which Saudi Arabia agreed to price its oil in dollars and invest surpluses in dollar-denominated assets, in exchange for American security guarantees. “Because oil is a core input to global manufacturing and transport, there is a natural incentive for global value chains to dollarize, and global surpluses to accumulate in U.S. dollars,” the report stated.

This circular arrangement has handed the U.S. an extraordinary advantage. As the world’soil consumers paid dollars for energy, those dollars flowed to the top producers in Riyadh and Abu Dhabi and from there, they circled back into Washington’s debt. For 50 years, not only did this petrodollar loop quietly keep American borrowing costs low and cement the U.S. dollar’s role as the world’s reserve currency, it also allowed Washington to brandish sanctions as a very effective foreign policy enforcement tool.

The same Deutsche Bank report also pointed out that the ongoing war could accelerate the shift in the oil trade toward the Chinese currency at a pace far exceeding previous projections, because the foundations for such a shift have already been laid. Even before the conflict broke out, the U.S. was no longer the largest buyer of oil from the Middle East. As the shale revolution made the U.S. energy independent, Saudi Arabia had been selling more than four times as much oil to China as to the U.S., with 85 percent of Middle East crude going to Asia.

Saudi Arabia has joined Project mBridge and established foreign exchange swap lines with China. Project mBridge, led by the People’s Bank of China, the Hong Kong Monetary Authority, the Bank of Thailand, and central banks of the United Arab Emirates and Saudi Arabia, uses blockchain technology to facilitate payments through the central bank digital currencies of each participating country. This system operates independently of U.S. dollar correspondent banking or the SWIFT network.

Not only is the infrastructure for yuan-denominated trade already in place, it is also being stress-tested in real-world conflict situations.

 

Although it is still in its early stages, the infrastructure for transacting outside the dollar system is already in place. Due to the sanctions imposed in recent years, a significant volume of Russian and Iranian oil exports is being priced and settled in local currencies such as the ruble, yuan and rupee. This shift is supported by alternative, non-dollar payment systems.

Not only is the infrastructure for yuan-denominated trade already in place, it is also being stress-tested in real-world conflict situations. Should it prove both functional and resilient, it could convince even more countries to make the transition, putting the U.S. dollar’s “unique privilege” under considerable pressure. When central banks no longer need to hold massive reserves of dollars specifically to purchase oil, the demand for U.S. Treasuries may decline, leading to higher borrowing costs and a revaluation of the dollar’s domestic and international purchasing power.

While the recent developments are significant and have the potential to meaningfully alter the status quo, it is crucial to remember that the world is still very far from making a decisive dent in the U.S. dollar’s supremacy. The petrodollar remains dominant, as it is still the currency used for the vast majority of global oil transactions, and is the primary world reserve currency. What we are witnessing now, however, might be the beginning of the end of the petrodollar system, and the start of a transition that may take years or decades to complete, if it ultimately happens at all.