From petrodollar to petroyuan: The rules of global geopolitics are being rewritten

For more than five decades, a simple but ironclad bargain has underpinned American global supremacy. In exchange for US security guarantees, Saudi Arabia and other Gulf monarchies agreed to price and settle their oil sales exclusively in US dollars, recycling their surpluses into American Treasury bonds. 

This arrangement, the petrodollar system, created an artificial but permanent source of global demand for the dollar, allowing the United States to run persistent deficits, finance its debt with impunity, and project economic power far beyond its shores.

That era is now ending. The war in Iran has not only destabilised the world's most critical energy chokepoint but has also exposed the fraying credibility of the American security umbrella. In its place, a new financial architecture is emerging: the petroyuan. And with it, the rules of global geopolitics are being fundamentally rewritten. 

As Mallika Sachdeva, Managing Director at Deutsche Bank, recently put it, the conflict could well be remembered as a key catalyst for an "erosion in petrodollar dominance, and the beginnings of the petroyuan."

The clearest signal of this shift is playing out in real time in the Strait of Hormuz, through which approximately one-fifth of the world's petroleum transits. According to multiple reports, Iran is leveraging its strategic control over the strait to force a currency change. 

Tehran has been conditioning tanker passage on settlement in Chinese yuan, creating the first operational "petroyuan corridor" in history. Chinese vessels reportedly move freely, while Western-linked tankers face delays or redirection. This is not a minor tactical move; it is the weaponisation of geography to compel a financial realignment.

What makes this moment genuinely transformative is the confluence of three long-building forces now converging at once. The first is economic gravity. China displaced the United States as Saudi Arabia's largest oil customer years ago. It has been the world's largest importer of crude for half a decade, with nearly half of Gulf oil now heading east. The second is technological infrastructure. 

In June 2024, Saudi Arabia chose not to renew its exclusive dollar-pricing commitment and has since built the technical capacity for yuan settlement, including a $7 billion currency swap with China and participation in the mBridge digital payment platform. 

The third, and most decisive, is the erosion of security credibility. The inability of the United States to protect its Gulf allies from Iranian missile and drone strikes—or, in the eyes of many regional leaders, even the will to do so—has shattered the psychological contract that made the petrodollar work.

Consider what this means. For fifty years, the petrodollar created a self-reinforcing loop: the world needed oil, therefore it needed dollars, and because it needed dollars, it needed US Treasuries. That loop allowed Washington to borrow and spend on a scale no other nation could match. It also gave the United States the unique ability to impose financial sanctions, cutting adversaries off from the global payment system. 

That power is now being challenged not by a single rival currency but by the emergence of parallel payment systems. Russia already sells energy to China in yuan. India is buying Iranian and Russian oil using the Chinese currency. The mBridge platform, which connects the central banks of China, Thailand, the UAE, and Hong Kong, processed over $55 billion in transactions by late 2025, offering a dollar-free alternative for cross-border settlements.

The cumulative effect is already visible in the data. The dollar's share of global foreign exchange reserves has fallen from 71% in 1999 to roughly 57% today, its lowest level since 1994. This is not a collapse, but it is a steady, undeniable erosion. And every barrel of oil settled in yuan is a barrel that no longer generates dollar demand. Over time, that reduces the natural bid under the greenback, weakening the foundation on which US financial hegemony rests.

Yet it would be both premature and simplistic to declare the dollar's imminent demise. The resilience of the greenback is not merely a matter of habit; it is rooted in structural advantages that no rival currently matches. 

As Sonal Desai, Chief Investment Officer of Fixed Income at Franklin Templeton, wisely cautions: "Oil is not priced in US dollars simply because the United States has long acted as the world's policeman... Oil exporters have a strong self-interest in getting paid in USD, because of what dollars represent: access to the deepest, most liquid capital markets in the world." 

US capital markets remain the deepest and most liquid on the planet. The dollar still accounts for nearly 90% of all foreign exchange transactions. China's capital markets remain relatively closed, and the renminbi represents only a tiny fraction of global reserves. In other words, no single currency is positioned to replace the dollar.

But that is precisely the point. What is happening is not a simple transfer of power from Washington to Beijing. It is the fragmentation of a monolith into a multipolar system. The future will not be a world of one reserve currency but of several: dollars, yuan, euros, perhaps even digital currencies and gold. 

In a fractured system, the dollar does not need to collapse for American power to be severely diminished. It only needs to become one option among many. Sachdeva's warning about "erosion" is more accurate than the predictions of a crash. Erosion is slow, quiet, and cumulative—until suddenly, the ground gives way.

The geopolitical consequences are profound. For the Gulf states, the shift toward the petroyuan is an act of strategic hedging, born not of ideological defiance but of cold pragmatism. As one analysis put it, "If the US cannot reliably protect its allies from the spillover of regional conflict, why should those allies continue to expose their fiscal sovereignty to the vagaries of American monetary policy?" 

The Saudis, Emiratis, and Kuwaitis are not abandoning America for China; they are diversifying their dependencies to ensure survival in a world where no single power can guarantee their security. Desai is correct that dollars offer unmatched market access. But that argument holds only so long as the United States remains a predictable and reliable partner. Credibility, once lost, is not easily restored by balance sheets alone.

For the United States, this is a wake-up call that cannot be answered by tariffs or threats. President Trump's reported proposals to impose 100% tariffs on BRICS nations that pursue de-dollarisation miss the point entirely. You cannot bully countries into using your currency when they are diversifying because they no longer trust your security guarantees. The petrodollar was always a political construct, not an economic necessity. And like all political constructs, it depends on credibility. That credibility is now in tatters.

The shift from petrodollar to petroyuan is not a forecast; it is already underway. It will not be marked by a single dramatic announcement but by a thousand quiet transactions: a swap line here, a yuan-settled cargo there, a digital payment bypassing SWIFT.

By the time the headlines catch up, the rules will have already changed. Either way, the rules are being rewritten. And it seems that no amount of bullying or unlawful military aggression by the United States and Israel, alone or together, can stem, let alone reverse, that rewriting.

Dr Mohammad Omar Farooq is a Professor and Head, Department of Economics, United International University

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.