KARACHI:

The petrodollar has been central to sustaining America’s seven-decade-long global hegemony built on a combination of military prowess, strategic alliances, and economic dominance. Since the 1970s, agreements between the United States and key oil-exporting countries, particularly Saudi Arabia, have anchored the international oil trade in the greenback. This arrangement created a structural demand for American currency, allowing the US to finance deficits, keep interest rates low, and wield disproportionate influence over global institutions.

On the downside, the US dominance of the global financial system also allowed Washington to weaponise the dollar – imposing sanctions on states and even seizing assets of those unwilling to align with its geopolitical objectives. This has fuelled resentment, particularly among countries seeking strategic autonomy. Though calls to reduce reliance on the dollar have surfaced intermittently, efforts at de-dollarisation remained tentative and failed to seriously challenge the supremacy of the “king dollar.” However, the freezing of Russia’s billions in the wake of the Ukraine war provided a fresh impetus to these de-dollarisation efforts.

Now, the latest US-Israel military aggression against Iran has added a new layer of volatility. The conflict has exposed underlying vulnerabilities in the petrodollar system, creating doubts about its durability. Paradoxically, it may also be nudging the global economy toward a more multipolar and less America-centric financial order. The Iran war is being described as arguably one of the most consequential foreign policy blunders in American history. Apparently, the Trump administration was banking on a rapid collapse of the Iranian regime, expecting that a decapitation strike targeting Tehran’s top military and clerical leadership would trigger internal disintegration. As in Iraq, Afghanistan and Libya, Washington and Tel Aviv assumed that overwhelming conventional military superiority would deliver a swift and decisive victory.

Iran, however, defied these expectations. It endured, adapted, and demonstrated remarkable resilience despite the assassination of dozens of its political, military and clerical figures. Far from capitulating, Tehran not only withstood the combined military might of two powerful adversaries but also leveraged the conflict to consolidate and project its strategic position. Iran’s chokehold of the Strait of Hormuz – a chokepoint through which roughly 20% of global seaborne oil and LNG passes – became a crucial cog in this strategic leverage. In the past, Iran had never blocked the strait despite threats and sanctions from the US and its allies. Its current decision to levy transit fees and demand payments in the Chinese currency and stablecoins poses a direct challenge to the dollar’s supremacy. By blocking access to one of the world’s most important energy arteries, Iran has effectively forced nations to reconsider their dependence on US-led frameworks.

The petrodollar system – formalized in the 1970s following the collapse of the Bretton Woods gold standard – is structurally vulnerable. Its stability depends on the uninterrupted flow of oil and the compliance of oil-exporting countries. By demanding yuan-denominated toll at the Strait of Hormuz, Iran has disrupted this equilibrium. Shipping traffic through the strait collapsed by almost 90%, while Brent crude prices surged past $100 a barrel. More importantly, China and Iran are setting up an alternative framework that bypasses the dollar, offering other nations the ability to transact in yuan or stablecoins for oil and transit rights. While US sanctions continue to complicate these transactions, the strategic precedent is undeniable: the dollar’s monopoly over global energy trade can be contested.

The American financial elite may not be happy with the prospects of the petrodollar’s decline, but the erosion of dollar hegemony carries benefits for global stability and equity. For decades, the petrodollar has allowed America to externalise costs, run chronic trade deficits, and leverage military interventions in oil-rich regions, especially Iraq and Libya, with little financial consequences. These military campaigns destabilised entire regions, created humanitarian crises, and spawned terrorism. The American ability to wage war with relative impunity has been a direct consequence of dollar dominance.

A multipolar financial system would serve as a check on such unilateralism. If global oil trade were to move away from the dollar, countries would no longer be compelled to align their foreign policies with US strategic priorities merely to safeguard liquidity and energy security. In turn, economies across Europe, Asia and Africa would gain greater autonomy in negotiating trade agreements, securing energy supplies and navigating sanctions regimes. Such diversification could also act as a restraint on the kind of reckless foreign policy decisions that have fuelled conflicts in the Middle East.

The Hormuz closure by Iran’s IRGC points to a broader trend: the gradual rebalancing of global power. For the last two decades, China has been steadily expanding its influence in the Middle East through investments, infrastructure projects, and energy partnerships. By accepting yuan-denominated fees and facilitating oil trade outside the petrodollar system, China positions itself as a reliable alternative to US hegemony.

Similarly, the Persian Gulf states, historically dependent on Washington for their security, may reconsider their strategic alliances if US military bases can no longer protect them. Diversified partnerships, whether with China, Russia, or regional actors, can reduce vulnerability and promote stability through interdependence rather than coercion. This rebalancing also reduces systemic risk. The concentration of financial and military power in one nation, no matter how robust, creates global fragility. The petrodollar allowed Washington to dictate terms globally, but it also meant that US domestic miscalculations – like the ill-conceived Operation Epic Fury in Iran – have outsized consequences. A multipolar system would distribute responsibility, incentivise diplomacy, and make international crises less catastrophic.

A multipolar de-dollarized energy market would encourage competition and transparency. It would reduce the ability of a single nation to weaponise energy for geopolitical objectives. Iran’s “Tehran Toll Booth” system, albeit controversial, exemplifies the emerging reality: states can exert influence over critical energy chokepoints without relying on the greenback. This may lead to more stable and predictable energy prices, as global markets adjust to diversified supply chains and currency options.

Not only that, breaking the dollar’s monopoly could encourage investment in clean energy, minimising global dependency on fossil fuels. Nations may become more willing to transition toward renewables if energy trade is no longer inherently tied to US monetary policy. In this sense, the Hormuz disruption could expedite the transition to a more equitable global energy system.

To sum up, the petrodollar decline – precipitated by the chaos of war, strategic miscalculations, and the ingenuity of Iran – could represent not the end of global order, but the beginning of a more resilient, fair, and multipolar world. The challenge for the US, and for all nations, will be adapting to this reality without allowing old dependencies and hegemonies to dictate the pace of global change.

THE WRITER IS AN INDEPENDENT JOURNALIST WITH SPECIAL INTEREST IN GEO-ECONOMICS