2 years ago, Saudi Arabia quietly canceled the ‘petrodollar’ deal with America that wired the world economy for 50 years. Then war broke out in Iran

The gold standard may have ended in the early 1970s, but something else quietly took its place for the next 50 years: oil. The so-called  “petrodollar” system wasn’t well understood for most of this time, but a secret deal between Henry Kissinger and Saudi Arabia ensured the dollar would remain the dominant reserve currency. The outbreak of war in Iran is exposing America’s Achilles’ heel, though, as China positions the “petroyuan” as the obvious successor, and to top it all off, the Saudis quietly killed the petrodollar two years ago. 

U.S. and Israel’s war on Iran has put a spotlight on the strength of the “petrodollar,” which makes up the cornerstone of America’s dominance over global trade, but economists warn the currency architecture has been eroding at its edges for years now.

Analysts are heralding the 2020s as marking the biggest change in the world’s relationship to the dollar since 1974, and every day the Iran war continues, the cracks in the old system grow wider and wider. To be sure, the dollar is still overwhelmingly dominant, but it’s no longer the only game in town. 

To understand this moment requires rewinding a bit to see how we got here.

Kissinger’s secret trip 

In 1974, the U.S. negotiated a deal with Saudi Arabia in which the Gulf country agreed to sell oil in U.S. dollars alone. In return, the U.S. would provide military aid and security. The U.S., then under President Richard Nixon, was looking to secure global demand for the U.S. dollar following the end of the gold standard in 1971. In the wake of the 1973 oil crisis, the U.S. was motivated to solidify its own oil supply chain.

Because oil was and is so fundamental to nearly every industry, the “petrodollar” became ubiquitous, and the dollar became the cornerstone of the global economy: Oil-rich countries needed a place to put their growing reserves of dollars and turned to U.S. Treasuries. Countries buying oil did so in greenbacks.

This cycle has created a currency architecture heavily favoring the U.S. dollar that has persisted for more than 50 years. Saudi Arabia, as well as Qatar, Oman, Bahrain, and the United Arab Emirates, require an estimated $800 billion in supporting reserves as a result of having their currencies pegged to the U.S. dollar. The Gulf Cooperation Council sovereign wealth funds have more than $2 trillion invested in U.S. assets.

The ongoing conflict in the Gulf, however, has newly exposed the weakness of the petrodollar. Following the first........

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