Deutsche Bank sees Iran war as potential turning point for petrodollar system

The global economic order has long rested on two key pillars: the prohibition of territorial conquest by force, enshrined in the UN Charter after World War II, and the petrodollar system, under which oil exports from the Middle East are exclusively priced in US dollars. Together, these foundations have supported a global trade system deeply tied to American financial networks. However, as the economic fallout from the ongoing US-Israeli war on Iran intensifies, financial experts are increasingly warning that the petrodollar system itself could come under strain.

Some analysts now believe the conflict could accelerate the erosion of the petrodollar, one of the cornerstones of US financial dominance, which is a view highlighted in a recent report by Deutsche Bank.

"The huge strategic importance of the Middle East to the dollar's role as the world's reserve currency should not be underestimated. The current conflict could test the foundations of the petrodollar regime,” Deutsche Bank researcher Mallika Sachdeva wrote in a special report last week.

The petrodollar system emerged from a 1974 agreement between the United States and Gulf Arab states, under which oil exports would be denominated in US dollars, with surplus revenues reinvested into US assets.

A key mechanism of this arrangement has been the purchase of US Treasuries by Gulf states, helping to keep American borrowing costs relatively low. Countries such as Saudi Arabia and the United Arab Emirates collectively hold around $250 billion in US government debt.

In addition, several Gulf economies—including Saudi Arabia, the UAE, Kuwait, Qatar, and Bahrain—peg their currencies to the US dollar, requiring them to maintain substantial dollar reserves and reinforcing global demand for the currency.

Yet the current conflict is raising concerns about the durability of this system. While Saudi Arabia and the UAE have shown some alignment with US policy in the conflict, analysts cited by Middle East Eye say the war has also triggered deeper doubts about Washington’s long-term role as the region’s security guarantor.

One of the most significant developments has been Iran’s effective control over the Strait of Hormuz, a vital chokepoint for global oil shipments. Control of such sea lanes has traditionally underpinned US claims to global strategic leadership.

Sachdeva warned that a failure by Washington to ensure maritime and regional security could undermine the very foundations of the petrodollar system.

“The current conflict may expose further fault, by challenging the US security umbrella for Gulf infrastructure and maritime security for global trade in oil,” she wrote.

“Damage to Gulf economies could encourage an unwind in their foreign asset savings held largely in dollars,” she added.

Tehran marches ahead to deal blow to dollar’s dominance

Iran has reportedly begun imposing transit fees on vessels passing through the Strait of Hormuz, according to a Bloomberg article citing internal sources, with some payments reportedly made in Chinese yuan and stablecoins.

The Islamic Revolutionary Guard Corps is said to oversee the process, requiring ship operators to submit cargo and vessel information before negotiating passage. Fees reportedly start at about $1 per barrel of crude oil, with preferential terms offered to friendly nations and stricter conditions imposed on others.

These developments are particularly significant given that around 90% of Iran’s oil exports go to China, which is also the largest buyer of Saudi crude.

Deutsche Bank suggested the conflict could ultimately mark a turning point in the global financial system.

The war, it said, could be remembered as "a catalyst for the erosion in petrodollar dominance, and the beginnings of the petroyuan”.

Concerns about the long-term viability of the petrodollar have been building for years, accelerating after the US imposed sanctions on Russia following the 2022 launch of military attacks on Ukraine. Since then, China has increasingly purchased Russian energy exports using a mix of yuan and roubles, further signalling a gradual shift in global energy trade dynamics.

By Nazrin Sadigova