Iran War Threatens Petrodollar As Tehran Pushes Yuan Oil Trade

The war involving Iran risks opening a new front against the United States in global finance, as Tehran moves to encourage oil shipments passing through the Strait of Hormuz to be traded in Chinese yuan rather than US dollars.

Iran has signalled that countries seeking safe passage for oil tankers through the narrow waterway could be pushed to settle transactions in yuan, a move that analysts say could weaken the petrodollar system that has anchored the dominance of the US currency for decades.

The Strait of Hormuz is the world’s most critical oil transit route, carrying roughly a fifth of global crude supplies.

Any shift in the currency used to settle those shipments could have far-reaching consequences for global markets because oil remains the most widely traded commodity.

A move away from the dollar in energy trade would strike at the heart of the petrodollar system — the arrangement that requires most oil transactions to be priced in US dollars, forcing countries to maintain large reserves of the American currency to purchase fuel.

The system dates back to the 1970s when the United States reached an understanding with major Gulf oil producers to price crude in dollars.

The arrangement ensured constant global demand for the currency while oil exporters reinvested surplus revenues into US assets, strengthening the dollar’s position as the world’s main reserve currency.

Iran’s push for yuan settlement comes as China expands efforts to internationalise its currency and reduce reliance on the dollar in global trade, particularly in energy markets.

Beijing, the world’s largest importer of crude oil, has increasingly encouraged suppliers to accept yuan payments, while several oil exporters have begun experimenting with non-dollar settlements in recent years.

The shift has also gained political backing from countries in the BRICS bloc, which have repeatedly called for greater use of alternative currencies in trade as part of efforts to reduce dependence on the dollar-dominated financial system.

Members of the group — which includes major emerging economies and energy exporters — argue that the current system gives Washington disproportionate influence over global trade through sanctions and control of the dollar-based financial network.

Russia has already increased the use of yuan and local currencies in oil sales following Western sanctions, while China has expanded yuan-denominated crude trading as part of its broader strategy to challenge the dollar’s dominance in global commodity markets.

Analysts say Iran’s attempt to link oil shipments through the Strait of Hormuz to yuan payments could accelerate that shift if large volumes of crude begin moving outside the dollar system.

Although the dollar remains the dominant currency for global reserves and international trade, growing geopolitical tensions and the emergence of alternative payment systems are slowly encouraging countries to diversify away from it.

For Washington, the conflict with Iran could therefore carry an unexpected financial consequence — speeding up efforts by rival economies to chip away at the petrodollar order that has long underpinned the strength of the US currency.

gandae@businessdayafrica.org