The cracks in the "petrodollar" have appeared. Can the Renminbi seize the opportunity to rise?

As tensions between the United States and Israel and Iran continue to escalate, oil prices have remained at elevated levels. Discussions about whether the foundation of the “petrodollar” system is being shaken—and whether “petro-yuan” is seizing a historic opportunity—are being brought up again.

The latest trigger for this topic comes from a research report by Deutsche Bank. The report suggests that the long-term impact of the Iran conflict on the U.S. dollar may lie in the fact that it tests the underlying foundation of the “petrodollar” system. When the United States no longer needs Middle East oil, when Gulf countries begin exploring non-U.S.-dollar payments, when global energy consumption accelerates toward localization and renewable energy, the dollar’s status as the world’s reserve currency may face a “perfect storm.” That, in turn, provides a key catalyst for “petro-yuan.”

However, analysts believe that over the next 10 years that can be foreseen, the status of the “petrodollar” may not be overturned. Constrained by the non–U.S.-dollar settlement practices of sanctioned oil-producing countries, Saudi Arabia and other major oil producers’ exploration of diversified settlement mechanisms, and the continued internationalization of the renminbi—these developments will gradually weaken the dollar’s monopoly-like impact on global energy trade.

Formed in the 1970s, the “petrodollar” system was gradually established by the United States after the collapse of the Bretton Woods system through strategic arrangements with Saudi Arabia. Its core is this: the United States provides Saudi Arabia with military protection, weapon supplies, and political support. In exchange, Saudi Arabia commits to pricing and settling its oil exports in U.S. dollars and to investing a large portion of its oil revenues into U.S. dollar assets such as U.S. Treasury bonds, thereby creating dollar “return flows.” After that, member countries of the Gulf Cooperation Council (GCC) and other oil-producing countries in the Organization of the Petroleum Exporting Countries (OPEC) generally also adopted U.S.-dollar settlement. With the dollar deeply bound to oil, a closed loop was constructed for global oil trade to be settled in U.S. dollars, with surpluses flowing back to the United States.

The “petrodollar” drives the “dollarization” of global value chains and provides important support for U.S. dollar hegemony. However, cracks in this system appeared long before this Middle East conflict. This is reflected in:

The reversal of U.S. energy position, with the center of gravity for Middle East oil shifting eastward. Thanks to the shale oil revolution, the United States achieved energy independence and is no longer the largest buyer of Middle East oil. According to data from the U.S. Energy Information Administration, in September 2019 the United States first became a net exporter of crude oil and petroleum products. Meanwhile, Asia has become the main destination for Middle East oil exports. Deutsche Bank’s data shows that now 85% of Middle East crude oil is sold to Asia. Taking Saudi Arabia as an example, its oil exports to China are more than four times its exports to the United States.

Oil-producing countries under U.S. sanctions, such as Russia and Iran, have largely conducted oil transactions outside the U.S.-dollar system. Russia’s oil exports mainly use rubles and renminbi for settlement, and Iran is also pushing for settlement denominated in non–U.S.-dollar currencies such as the renminbi, further weakening the dollar’s monopoly position in energy trade.

Saudi Arabia promotes strategic autonomy and explores diversified settlement routes. Saudi Arabia is actively pushing its “Vision 2030” to reduce reliance on the oil economy and enhance strategic autonomy. In the defense sector, Saudi Arabia plans to raise the localization rate of military spending from 4% in 2018 to more than 50% by 2030. In the financial sector, in June 2024 Saudi Arabia officially joined the multilateral central bank digital currency bridge project (Project mBridge). The project was co-initiated in 2021 by the Innovation Hub of the Bank for International Settlements together with the Digital Currency Research Institute of the People’s Bank of China, the Hong Kong Monetary Authority, the Bank of Thailand, and the Central Bank of the United Arab Emirates. Its aim is to build a multilateral cross-border payments platform for central bank digital currencies based on distributed ledger technology. As of November 2025, the mBridge platform had processed 4,047 transactions with a total transaction value of $54.49 billion, of which the share of the digital renminbi exceeds 95%. The platform provides member countries with a cross-border settlement option that does not rely on the SWIFT system.

Deutsche Bank believes that the current conflict further exposes deep cracks in the “petrodollar,” shaking the core foundation of the “security-for-oil” pricing arrangement. This is reflected in the following: during the conflict, U.S. military assets and bases in the Gulf region were attacked, and oil infrastructure in the Gulf region was also hit. As the Strait of Hormuz faces closure, the United States’ ability to provide maritime security to ensure the flow of global oil is challenged. At the same time, there are reports that Iran is negotiating with multiple countries, and the conditions under which ships can pass through the Strait of Hormuz may be tied to payments for oil in renminbi. The report therefore infers that this conflict could become a key catalyst for eroding the dominant position of the petrodollar and ushering in a “petro-yuan” era.

The “petro-yuan” system was born in March 2018, when crude oil futures contracts denominated in renminbi were officially listed and traded on the Shanghai International Energy Exchange, marking the birth of the world’s first renminbi-denominated crude oil futures market. Before that, global crude oil futures trading had long been dominated by the U.S. West Texas Intermediate (WTI) on the New York Mercantile Exchange and Brent crude oil on the London Intercontinental Exchange, and both were settled in U.S. dollars. The launch of China’s crude oil futures market for the first time provided global oil trade with a pricing and settlement option outside the U.S. dollar.

Chen Shouhai, professor at the School of Economics and Management, China University of Petroleum (Beijing), and director of the Center for Oil and Gas Policy and Legal Studies, told Jiemian News that Deutsche Bank’s view is indeed sharp in capturing some surface-level changes, but it overlooks the deeper realities that support the petrodollar system. He pointed out that “security for dollars” is the core contract for the long-term operation of the petrodollar system. From this round of the Middle East conflict, Iran’s actions toward Israel and related targets are essentially a passive retaliation under continued U.S.-Israel pressure. Its attack scope, strike intensity, and real spillover effects remain highly restrained, and the United States still retains overwhelming military and security advantages in the Middle East.

Chen Shouhai also said that when oil-producing countries push for diversification of oil settlement, it is both a political option and an urgent need for survival; the two are highly intertwined, and the situations of different countries differ significantly. On the political front, continuing to use U.S.-dollar settlement is, in essence, a low-cost compromise that avoids direct confrontation with the U.S.-led financial and security system. For most oil-producing countries, this is a realistic choice for maintaining stability in the external environment. On the survival front, the United States’ frequent use of financial sanctions tools—freezing other countries’ overseas assets and restricting SWIFT channels—has materially damaged the credibility of the dollar. The case of frozen Russian foreign-exchange assets made all energy exporters realize that excessive dependence on the dollar means placing national wealth and trade lifelines under external and controllable risks, so diversified settlement has become a necessary risk-hedging tool.

Dong Xiucheng, executive dean of the China Institute of Carbon Neutrality for International Economic Research at the University of International Business and Economics, also told Jiemian News that the petrodollar is built on the U.S. dollar’s global liquidity, mature financial system, and the influence of the United States in military and trade. These structural supports are difficult to replace in the short term. However, unstable global energy supply and the frequent use of the U.S. dollar as a sanctions tool are prompting more oil-producing countries to face the risks of a single currency and push energy-trade settlement toward diversification. With China’s large scale of oil imports and stable currency value, the renminbi is expected to take a larger share in this process.

Wang Wenhu, an analyst at Hongyuan Futures, offered another perspective showing that the same event could produce entirely opposite effects in the short and long term. He told Jiemian News that, in the short term, the conflict between the United States and Iran not only did not weaken the dollar, but actually strengthened the petrodollar.

“Military conflict and negotiations between the United States and Israel and Iran still involve significant uncertainty. Oil and gas prices are expected to remain high. Because strategic petroleum reserves are limited, many countries have to spend more dollars to buy oil, which leads to tight dollar liquidity in the market,” Wang Wenhu said. “According to data from the European Central Bank, as of March 25, the Eurozone financial market systemic stress index jumped from 0.0087 on February 25 to 0.0624. In the same period, the United Kingdom’s index rose from 0.0075 to 0.1028. Against this backdrop, central banks in countries such as Turkey have begun selling assets such as gold, U.S. Treasuries, and U.S. stocks to obtain dollars.”

Analysts emphasize that the rise of “petro-yuan” depends not only on external geopolitical “catalysts,” but also on substantive progress in China’s domestic financial reforms.

In short, the development of petro-yuan faces three deep-layer challenges: first, the capital account has not yet been fully opened. The renminbi has not achieved full convertibility on the capital account; renminbi held overseas cannot be freely converted, which makes international investors worry about holding renminbi. Second, the network effects are insufficient. The global network formed by the petrodollar over half a century is its real moat— the dollar is not only a settlement currency, but also a universal tool for pricing, reserves, financing, and investment. By contrast, goods and services priced in renminbi account for only about 3% in global trade. The cross-border interbank payment system for renminbi (CIPS) handles far less volume than SWIFT, and the cost of switching currencies is high. Third, the depth and liquidity of the asset pool are insufficient. By the end of 2025, renminbi-denominated assets held abroad had exceeded RMB 10 trillion, but compared with the dollar, the gap remains huge—U.S. dollar foreign-exchange reserves held by other countries’ governments alone (excluding the private sector) exceed $7 trillion. The depth, liquidity, and richness of instruments in China’s bond, stock, and derivatives markets are far behind the dollar. The willingness and ability of global central banks and institutions to allocate renminbi are limited.

Chen Shouhai emphasized that the core of dollar hegemony is not that “oil must be priced in dollars,” but rather the systemic dependence of the world on trading, settlement, reserves, and investment in dollars, as well as the depth, liquidity, and safety of dollar asset markets. At present, no other currency can form a comprehensive replacement.

Dong Xiucheng believes that petro-yuan faces constraints such as limited cross-border usage scope, insufficient openness of financial markets, and an incomplete set of supporting hedging instruments. In response, he proposed four recommendations for developing petro-yuan: first, expand renminbi settlement and currency swaps with oil-producing countries to form a stable trade closed loop; second, improve the renminbi-denominated pricing and delivery settlement system for crude oil futures to enhance liquidity and international participation; third, accelerate the promotion of CIPS, and pair it with renminbi-denominated financial products to increase the willingness to hold; fourth, steadily advance financial opening, improve renminbi convertibility, and enrich the supply of hedging instruments.

In addition, analysts also suggest continuously expanding the application scenarios for the renminbi in the countries participating in the Belt and Road Initiative, and advancing renminbi internationalization in a steady, prudent, and solid manner. Specifically, expanding renminbi use in trade in bulk commodities, infrastructure financing, and cooperation across industrial chains can help cultivate the international currency functions of the renminbi and form a virtuous cycle of “trade—investment—currency.”