Theory #1 – War Is a Boon for the Petrodollar

Wall Street Journal writer Diana Choyleva claims The Iran War Is a Boon for the Petrodollar

America strikes back against China's patient challenge to the U.S. currency's supremacy.

A Deutsche Bank report making the rounds argues the Iran war represents a "perfect storm" for the petrodollar, the primary currency in which oil is bought and sold. The report says that U.S. military entanglement in the Gulf, the weaponization of the Strait of Hormuz, and reports that Tehran is granting passage in exchange for yuan-denominated payments add up to a historic blow to dollar dominance. The argument is superficially compelling. It is also exactly backward.

Start with the threat to the petrodollar before this conflict began. China had spent years methodically building the infrastructure to supplant dollar dominance in oil trade: yuan settlement corridors; the mBridge platform, which allows financial institutions to bypass dollar rails and move digital currencies across borders; and deepening financial and technological ties with Gulf producers. Beijing's ambition wasn't a dramatic overnight coup. It was patient structural erosion. Shift enough oil settlement into yuan, recycle enough petrodollar surpluses into Chinese assets, and the architecture of dollar dominance quietly hollows out.

The petrodollar system, born from the 1974 security-for-oil-pricing bargain between the U.S. and Saudi Arabia, rests on three pillars: oil priced in dollars, transactions settled in dollars, and oil revenue recycled into dollar-denominated assets. Because oil is so central to global manufacturing and transport, paying for it in dollars creates a gravitational pull that dollarizes trade, saving and reserves across the global economy. Undermine that dollar-based oil trade, and the whole edifice begins to shift.

Washington has noticed. Gulf states, led by Saudi Arabia, supported the U.S. campaign against Iran and have so far viewed American military performance favorably for the most part. Whatever one thinks of the conduct of the war, one thing is clear: When the security commitment was tested, it held.

The petrodollar has two legs: the "petro" and the "dollar." China was making progress on both. For now the U.S. is pushing back hard in the Gulf, in Caracas, and at the Strait of Hormuz. The dollar's long-term fate will ultimately depend on whether Washington sustains this strategy and on whether the global energy transition eventually makes the contest moot. Neither outcome is certain. But those who conclude that the petrodollar is already in its death throes are reading the map upside down. The storm is real. The dollar is fighting back.