There is a growing sense among policymakers and markets that the era of the petrodollar may be under strain. The escalation of tensions around Iran, disruptions in Gulf shipping routes, and experiments with alternative settlement currencies have revived questions about whether the US dollar still rests on its historic energy foundation. Yet, as argued in a Financial Times analysis drawing on decades of financial history, this framing may misunderstand where dollar power actually comes from. The real story is less about oil barrels priced in dollars and more about an invisible banking architecture that operates largely outside the United States itself.
The idea of the petrodollar emerged in the aftermath of the 1970s oil shocks, when prices surged following the Yom Kippur war and the Arab embargo. At the time, oil-exporting states accumulated vast surpluses that needed somewhere to go. In financial centres like London, then chronicled in publications such as Euromoney, traders and bankers observed this sudden flood of wealth with fascination and anxiety. Satirical figures like “Herbie,” the fictional American banker struggling to understand the global currency flows around him, captured a deeper truth: oil money was being rapidly recycled into Western financial markets, particularly dollar-denominated assets. As oil prices climbed from just a few dollars a barrel to more than $10, the notion took hold that a political arrangement had emerged—Arab oil priced in dollars, recycled into US financial instruments in exchange for security guarantees.
But the Financial Times narrative stresses that this interpretation confuses correlation with causation. The eurodollar system, a vast offshore network of dollar-denominated banking, already existed in London before the oil shocks reshaped global energy markets. European and international banks had already begun creating and trading dollar liabilities outside the reach of US regulators. In this system, dollars were not simply issued by the Federal Reserve but multiplied through commercial banking balance sheets abroad. Oil exporters in the 1970s did not adopt the dollar because of a geopolitical bargain; they used it because the global infrastructure for dollar finance already dominated international trade and capital flows.
That infrastructure remains the foundation of dollar supremacy today, even as visible indicators of US monetary influence show signs of gradual change. Central bank reserve data, for example, suggest that the dollar’s share of global holdings has declined from around 65 per cent a decade ago to closer to 57 per cent. Yet, as analysis cited in the Financial Times notes, this shift is heavily influenced by specific national decisions, including Russia’s diversification away from dollar assets, rather than a broad global retreat. More importantly, reserves represent only a small part of dollar usage. A far larger share of global trade is now invoiced in dollars, reflecting what economists call a “dominant currency paradigm.” Exporters often choose the dollar not because of diplomatic alignment but because it reduces currency risk in global pricing networks. Estimates suggest that a quarter to over half of global trade is still invoiced in dollars, despite the US accounting for only a fraction of that trade.
Beneath these visible layers lies an even more significant but less understood structure: offshore dollar creation. Banks outside the United States routinely extend dollar-denominated credit and maintain dollar liabilities, effectively creating “eurodollars” beyond the direct control of the Federal Reserve. According to data cited in the Financial Times, roughly $14 trillion in such offshore dollar liabilities exist alongside more than $19 trillion held within the US financial system. This means that around 40 per cent of all dollars in circulation are effectively created outside US borders. Comparable systems in other currencies remain far smaller, with offshore euro markets and yuan usage not approaching similar scale. Crucially, this offshore dollar system is expanding rather than contracting, reinforcing the global liquidity that underpins trade and finance.
This architecture also explains why dollar dominance has proven resilient even in periods of geopolitical strain. Unlike the narrative of oil-for-security bargains, the real stabilising mechanism of the system lies in central bank cooperation and liquidity backstops. During the 2008 financial crisis and again during the pandemic, the Federal Reserve extended massive swap lines to major central banks, temporarily supplying hundreds of billions of dollars in liquidity to global markets. These arrangements, described in Financial Times reporting as more powerful than traditional military leverage in financial terms, ensure that offshore dollar markets remain stable during periods of stress. They also underscore a key asymmetry: while countries such as China have developed swap networks for the yuan, these remain largely untested in global crises and lack the same credibility.
Even as Iran increasingly sells oil in yuan and explores alternative settlement mechanisms, including occasional use of cryptocurrencies in regional trade flows, the structural dependence on dollar liquidity remains intact. Shipping routes through the Strait of Hormuz may be disrupted or politically contested, but the deeper system of dollar financing does not rely on any single maritime corridor. It relies instead on the willingness of global banks to continue operating in dollars and on the Federal Reserve’s readiness to support that system in times of stress.
Ultimately, as the Financial Times analysis concludes, the dollar’s dominance is not anchored in the petrodollar narrative that emerged in the 1970s, nor in the visible geopolitics of naval power in the Gulf. It is anchored in a decentralised but tightly interconnected banking system that spans London, New York, and financial hubs worldwide. The US may experience fluctuations in geopolitical influence, and the symbolism of the petrodollar may fade under pressure from shifting energy alliances. But the dollar itself is not simply a national currency projected abroad. It is a global financial infrastructure, sustained as much by private banks and offshore balance sheets as by state power.
In that sense, the real question is not whether oil will continue to be priced in dollars, but whether the Federal Reserve and its international partners will maintain the liquidity guarantees that keep the offshore dollar system functioning. If that support were ever withdrawn, the implications would extend far beyond energy markets. For now, however, despite political upheaval and shifting trade patterns, the deeper machinery of dollar finance continues to operate largely unchanged beneath the surface of global headlines.
