The world was already dedollarising thanks to rising East-West tensions and the US decision to weaponize the dollar in 2022 by seizing the Russian central bank’s reserves. Trump has gone a step further and one of the outcomes of the war in Iran will be acceleration of de-dollarization, a rush into boosting renewables and reducing the greenback‘s share in currency reserves. It’s a perfect story for the petrodollar system, the analysts at Deutsche Bank say in a report released on March 24.

The unfolding energy crisis will not be as bad as the one Europe faced in 2022, experts say, partly thanks to a buffer of green energy that has been built in the last four years. On March 25 for the very first time Spain supplied the entire country’s power needs using only renewables - a historic landmark.

The closing of the straits of Hormuz has highlighted to everyone just how vulnerable they are to the import of energy according to a new report from amber some 3/4 of the world's import fossil fuels to power their economies which eats up at least 3% of GDP thanks to the tumbling solar powers and the concurrent battery revolution  all that's missing now is the appearance of grid level eight-hour batteries for the green revolution to be complete. At the same time, the switch to EV's is well underway which is also going to gut the demand for oil eventually. As this process unfolds and the demand for oil and gas falls that will further undermine the need for dollars.

"A world that becomes more self-sufficient in defence and energy would also be a world that holds less USD reserves. 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 may be the perfect storm for the petrodollar," Deutsche Bank said in a new report that called the Iranian war a “perfect storm” for the petrodollar.

The gulf region exports oil and gets paid for it with dollars. It then reinvests those dollars back into American securities and as such forms a major driver of both the US economy and by extension the rest of the world as well. Deutsche Bank analyst asked if the fault lines are now being tested by blocking the flow around that loop then they could be, “significant downstream effects to the dollar's use in global trade and savings, and the dollar's role as the world's reserve currency.”

US President Donald Trump’s Decision to go to war with Iran and this is stabilize the entire region has been mess with displeasure by the rest of the gulf nations. Thanks to the petrol dollar trade they have been promoting an image of ability and prosperity as part of their various “Vision” economic transitional programs to break their hydrocarbon dependency. America was supposed to be their biggest ally in this program but instead Trump has started a major war in their backyard and destroyed the vision branding they had been working so hard on.

One of the consequences of the Iranian do they go for is going to be all the countries in the region are going to seek greater self-sufficiency in defence and energy which in itself will reduce the global demand for dollar reserves.

The report continues drilling into the various fault lines in the existing system that are now being exposed.

Pre-existing fault lines: Pressure on the system predates the current conflict, reflecting structural changes in global energy trade and regional policy.

“The foundations of the petrodollar regime were under pressure even before this conflict. There were already signs of instability to the long-standing arrangement to price GCC oil in dollars in exchange for security: most Middle East oil is sold to Asia now not the US; sanctioned oil has already been trading off dollar rails; Saudi Arabia has been localizing defence and experimenting with non-dollar payment rails alongside other Global South central banks.”

Conflict-driven risks: Recent geopolitical tensions may have exposed additional vulnerabilities, particularly around security guarantees and financial flows.

“The current conflict may have exposed further fault lines, by challenging the US security umbrella for Gulf infrastructure, the maritime security for global trade in oil, and encouraging a potential unwind in Gulf dollar savings. In this context, reports that the passage of ships through the Strait of Hormuz may be granted in exchange for oil payments in yuan should be closely followed. The conflict could be the catalyst for erosion in petrodollar dominance and the beginnings of the petroyuan.”

Emerging payment alternatives: New financial infrastructure is accelerating the development of non-dollar settlement systems, reducing reliance on traditional channels.

“Look at change/pressure number 3 below, mBridge and digital currency are front and center. The days when the only payment rails available belonged to the dollar are over. Digital payments and more traditional China CIPS are growing threats.”

Shift in oil trade flows: Structural changes in demand have altered the balance of global energy markets, weakening the traditional alignment between the US and Gulf producers.

“The US was no longer the biggest buyer of Middle East oil. With the shale revolution making the US energy independent, Saudi Arabia had been selling more than four times as much oil to China as to US. 85% of Middle East crude oil goes to Asia. This already introduced a fundamental instability with reports that China was keen for more oil to be invoiced in yuan.”

Defence localisation efforts: Saudi Arabia has been seeking to reduce reliance on foreign suppliers as part of its economic diversification strategy.

“Saudi Arabia was already looking to localize more of its own defence. Under Vision 2030, Saudi Arabia had been targeting an increase in the domestic content of military spending to 50%, looking to reduce dependence on foreign imported arms.”

Digital currency initiatives: cooperation between central banks is advancing alternative payment systems that bypass dollar-based infrastructure.

“Saudi Arabia had joined Project mBridge and signed FX swap lines with China. Project mBridge is an initiative involving the PBOC, HKMA, Bank of Thailand, and the central banks of the UAE and Saudi Arabia. It uses blockchain technology to facilitate payments in the central bank digital currencies of each country. Crucially it does not depend on USD correspondent banking or SWIFT, and is at the minimum viable stage. The rails to transact outside of the dollar have already been built.”

Sanctions and non-dollar trade: Existing sanctions regimes have already accelerated the use of alternative currencies in global oil markets.

“Sanctions on Russia and Iran meant significant oil trade was already taking place outside of dollar rails. Sales of Russian and Iranian oil have been priced and transacted in a range of local currencies from ruble, yuan, rupee with non-dollar payment infrastructure having been used.”

Green energy transition accelerated: Another big take away from this crisis is the need to break or reduce dependence on fossil fuels independently from the need to deal with the Climate Crisis. With the reduction of Qatar's ability to produce and export LNG, coupled with the sanctions on Russia's LNG, this leaves the US as the dominant player in the liquid gas business. That's too much geopolitical exposure to a single supplier of crucial energy for most governments. The green revolution was accelerating but the Iran war will catalyze it. And most of the pieces are already in place as EMBER detailed in a recent report arguing that's clean energy sources can replace some 70% of fossil fuel imports used to power countries.

Technologies enabling large-scale electrification could significantly reduce countries’ reliance on imported fossil fuels, according to research by Deutsche Bank, as governments seek to strengthen energy security by switchin the universally available enegy of the sun. Deutsche Bank analysts said more than three-quarters of global economic activity could be electrified using existing technologies. Electrification of transport is expected to play a particularly significant role while the rapid declines in renewable energy costs have improved the economics of domestic power generation.