Does the Iran war mark the beginning of the end of US dollar hegemony?

It is March 2024 and I am standing on an observation tower in the middle of a solar power plant near Bangalore, India, operated by the Karnataka Solar Power Development Corporate Limited.

As far as the eye can see, just solar panels all round on 12,709 acres. This is a 2 Gigawatt solar power plant – one of India’s 55 mega solar parks. According to the Indian government’s Panchamrit Declaration at COP 26 (2021), India’s goal is 500 GW of non-fossil-fuel-based electricity. It achieved 259 GW in 2025, which is more than 50% of India’s total electricity generation, of which 129 GW was solar power.

The following year I went to China. On 25 August 2025 the board of the National Transmission Company of South Africa was sitting in the imposing boardroom of the Hubei provincial headquarters of State Grid. Against a gigantic dark green background with stark white Chinese writing, 10 Chinese men in black suits and black ties sit neatly on one side of a massive boardroom table, with the provincial chairperson, Wu Yingzi, in the middle.

It’s a smart place to bring us: Hubei’s population is similar to South Africa’s (55 million) and its electricity generation capacity is 60 GW (SA’s is 48 GW, 60 GW if you add all the utility scale and rooftop renewables). We are there to learn from the most technologically sophisticated electricity grid operator in the world – State Grid. State Grid operates a 3,000 GW grid, with more than 50% of the energy it transmits across China sourced from renewables.

Both China and India want to electrify everything and then connect all the grids to renewables. They are the electro-states of the future that will replace the petro-states that dominate North America and the Middle East. They are the global drivers of the unfolding energy transition. Their investments in renewable energy generation are larger than investments in all energy by the rest of the world combined. They are unstoppable, and with oil prices breaking through the $125 per barrel ceiling, the energy economics is on their side.

Historic meaning of the war

This is the lens through which I see the historic meaning of the bombardment of Iran that Israeli Prime Minister Benjamin Netanyahu convinced US President Donal Trump was a good idea. By destroying the Gulf’s oil infrastructure and systems, this illegal war will push up oil prices so high that it will do more to accelerate the energy transition than a hundred climate conferences.

There is plenty of evidence now that the illegal joint US-Israeli attack on Iran has triggered deeper underlying dynamics that we cannot understand if we remain attached to old ways of seeing the global financial and energy order. Two recent headlines in the 23 April edition of The Economist are the canaries in the coal mine: “Xi Jinping wants a powerful currency. America’s war has helped.” And: “Renewables are shining. The Iran war amplifies their appeal.”

The first signals the decline of the petro-dollar, and the second the acceleration of the energy transition as oil prices climb ever higher – hitting the $125 mark on 30 April. Both headlines signal shifts that arise directly from the same geopolitical shock: the regional conflagration triggered by the US-Israeli military in the Middle East that has catalysed the worst oil shock in modern history.

If US global hegemony is premised on cheap oil traded in US dollars, how do we explain a military strategy that achieves exactly the opposite? We need to look deeper into the more long-term underlying dynamics of oil, dollars and technology to understand the short-term strategic miscalculations of a hegemon in decline.

Many commentators have, since the bombardment began at the end February, pointed out that a rapidly rising (and volatile) oil price will do more to accelerate the energy transition than climate commitments. This fact is not lost on the many speakers from the 50 governments (including oil producing countries) represented at the Conference on the Transition Away from Fossil Fuels in Santa Maria, Colombia, that took place on 24-29 April at exactly the moment that the Strait of Hormuz was double blocked by Iranian and American forces.

At this meeting, Colombia’s President Gustavo Petro questioned whether “fossil-fuel capitalism” can in fact reform itself. The road to “fascism” via “barbarism” is, he argued, more likely. And the proxies of hegemons will be what makes it happen – to wit, the destruction wrought by the Israeli Defence Forces in Gaza and South Lebanon.

A renewable energy first

In a new review by the International Energy Agency (that led an irritated White House to call for a stop to it’s reports), it was reported that solar power provided 25% of the world’s new energy in 2025, higher than new gas (17%) and for the first time renewable energy produced more electricity than coal – 34% versus 33% of the global total.

Furthermore, for the first time ever, newly constructed renewables produced more electricity than the increase in demand for electricity. That is why, for the fourth time since 2000, fossil fuels produced less electricity in 2025 than the year before. The driver is not climate change, it is prices.

Renewables are cheaper in India than coal generation, even if you include the cost of batteries to provide 24/7 outputs. In China, where the largest grid in the world enables 3,000 GW of installed capacity (compared with a mere 254 GW in the whole of Africa), for the first time in 2025 total generation of electricity from renewables exceeded the 50% mark. China has four times more renewable energy than the whole of Africa from all its energy sources!

Using this asset, China is focused on electrifying everything in order to reduce its dependence on oil. As the oil price rises, many other countries in the developed and developing world are doing the same. This message was loud and clear at the historic Santa Maria conference. China is now not only the largest generator of renewables, it is the largest supplier of the equipment needed to decarbonise the global economy, and it is becoming easier to sell this kit in yuan (at lower interest rates) to countries who are building up their yuan reserves in order to make these deals.

If energy is no longer dependent on oil, then it is also no longer dependent on US dollars.

What is the petro-dollar?

So what is the petro-dollar? At the Bretton Woods Conference after World War 2, reflecting the balance of military and financial power at that historic moment, it was agreed that the US dollar would be pegged to gold, and all other currencies pegged to the US dollar. This meant the value of all US dollars equalled the value of gold reserves for the next quarter century.

When the US started to run out of money (to finance, among other things, the Vietnam war) it needed to print more money.

But this was impossible if it could only print an amount equal to the gold reserve. And so, President Nixon summarily announced on 15 August 1971 that he had, as he put it, instructed the Secretary of the Treasury to “temporarily suspend the convertibility of the dollar into gold”. Needless to say, what was supposed to be temporary became permanent because the US dollar replaced gold as the ultimate store of global value.

The global financial turbulence triggered by Nixon’s unexpected move was only calmed when Henry Kissinger travelled to Saudi Arabia after the Yom Kippur War (which, of course, is what triggered the 1973 oil crisis) to negotiate the deal that created the petro-dollar: henceforth, it was agreed, oil would be traded in US dollars thus ensuring Saudi Arabia never cut off oil to the US again.

The deal was that the Saudis would buy US Treasury Bonds and those dollars would get reinvested back into Saudi Arabia to buy the oil, and also provide loans to build modern-day Saudi Arabia. As other oil producers came online, they just joined the petro-dollar system, and so the Kissinger solution became a global solution that cemented global oil production to the US dollar.

This was the start of what Yanis Varoufakis calls the “great global surplus recycling mechanism”: US dollars flow out of the US to pay for over-consumption by US consumers, but get recycled back into the US dollar system through investments, including in Wall Street or Treasury Bonds. For example, the US allowed Germans to sell more cars to Americans on condition they invested a portion of their profits in Wall Street in US dollars.

As long as oil was traded in dollars, so the global quantity of dollars expanded in tandem (although at a faster rate) with growing oil production. This was not about pegging the quantity of dollars to the value of oil (as if oil just replaced gold); it was about enabling private banks within the post-1971 credit-based system outside the US to create dollars by extending credit (in US dollars) that was ultimately secured by a global hierarchically structured financial system secured at the top by the Federal Reserve and the US Treasury. This has become known as the Off-Shore US Dollar System.

As long as US dollars could be recycled fast enough to enable high enough returns on the dollar to be reproduced forever, the US global financial monetary empire could be assured without colonial control. Underpinned, of course, by 800 military bases in 80 countries. This is why the US economy can finance itself off the largest mountain of debt in the world.

US debt

For the first time ever, by April 2026 US debt was the same size as GDP ($31-trillion). Contrary to what many think, US debt is not irrational – it is a necessary cog in the great recycling mechanism that effectively transfers wealth from the rest of the world into the US via the Off-Shore US-Dollar System. But to survive, the global cyclical flows cannot shrink, they must always increase in size and even velocity.

In short, the central tenet of US hegemony until now was simple: the steadily increasing number of barrels of oil that supplied 60% of the world’s energy (oil) must continue to be traded in US dollars. But this is what has begun to change. Firstly, with the rise of the BRICs-plus, less and less oil is being traded in dollars. Secondly, less and less energy comes from oil as renewables expand exponentially. Put the two together, and it is obvious that the status quo cannot survive. It is also obvious where both come together – the double blockage of the Strait of Hormuz.

Venezuela started trading oil in non-US dollars, and its president was kidnapped. BRICs-plus countries that stated their desire to stop cross-border trading (of everything) in US dollars was threatened by Trump with 100% tariffs and total exclusion from the US market.

Since the US imposed sanctions on Iran (specifically exclusion from Swift), it has traded oil in Chinese yuan, Euros, Indian rupees, Russian rubles and even bartering (food or weapons for oil). The Iran Central Bank became increasingly more active in supporting non-dollar oil trading by holding ever-larger non-dollar reserves. Unsurprising, then, that the original goal of the military action against Iran was regime change. What exactly the goal is now depends entirely on the irrationality of Trump’s strategic calculus on any particular day.

As the petro-dollar gets weakened by the military actions of the very government that prints US dollars, the Chinese are taking the gap, strongly supported by the Iranians who no longer need US dollars to purchase what they need from China. Using the Chinese-built non-US dollar Cross-Border Interbank Payment System (CIPS), transactions worth 920-billion yuan were processed in March 2026 (shortly after the conflict began), jumping dramatically to 1.2-trillion yuan in April 2026.

The big jump is caused by the rapid rise in Iranian oil traded in non-US dollars, Strait of Hormuz tolls being paid in yuan, and Chinese capital fleeing the Gulf because it no longer feels protected by the US military. On a different but equally subversive platform, 95% of the rapidly expanding quantity of digital payments flowing through the payment platform called Project mBridge set up by Asian (including Chinese) and UAE Central Bankers is transacted in digital yuan currency.

As of 2026, more Chinese cross-border transactions were conducted in yuan than in dollars. Yuan denominated so-called “Panda Bonds” are proliferating, and getting bought up by non-Chinese governments that need yuan-based trading instruments, corporations that trade heavily with China, western banks (like JP Morgan) and even Western hedge funds that see opportunity in the yuan as the dollar declines relative to it.

A new ballgame

Payment systems are the rules-based coordinators of credit transactions (i.e. the IOUs that grease the wheels of the global financial system), not the conveyors of actual chunks of cash (currencies). They play a central role in expanding the asset and liability sides of the double-entry books that make it possible to create money out of nothing. And what they created until now in the Off-Shore Dollar System are US dollars. When a payment system emerges that creates credit in non-US dollars, the ballgame starts to change fundamentally.

This new ballgame was starkly evident at a conference in Dakar, Senegal, on 12-13 May 2026, on the debt crisis in Senegal: towards sustainable and progressive solutions as alternatives to the International Monetary Fund’s (IMF’s) austerity approach. Delegates were informed that China is proposing to several African Governments that it is willing to refinance US dollar loans in yuan at lower interest rates.

Senegal is facing a debt crisis despite a recent oil and gas bonanza. To effectively wrest control of this resource from US dollar circuits, the Chinese may well offer to refinance the accumulated debt at a lower interest rate. This would take the IMF out of the picture. Possibly for the first time, the conference heard, African governments have a way to escape the IMF’s dollar-based austerity programmes.

As the petro-dollar goes into decline in a multipolar multi-currency world, US debt becomes harder to service as bond yields rise and many countries extract their currency and gold reserves from the US financial system (e.g. Germany’s decision to return its gold reserves to Germany). The US needs to borrow heavily to service its debt. For decades now, the oil-producing Gulf States (following the Kissinger-Saudi deal) have enabled this by buying US debt. (Others have also, of course – in particular Japan, and also China, but declining overall since 2008.)

As oil revenues into the Gulf States decline because of the war, they have less and less free cash to continue to buy up US debt (in particular US Treasuries) and invest in US assets. And so, out of this war-triggered imbroglio (which the US brought upon itself) has emerged one of the more amazing financial deals aimed at keeping the post-1971 US dollar system afloat – the US Treasury secretary’s approval of swap lines for Gulf and Asian states.

Swap lines are essentially big chunks of cash that the US Treasury (or the Federal Reserve via Central Banks) lends to countries who run short of dollars. But the US Treasury only has authority of (the much more limited) Treasury swap lines. The plan is to use swap lines to pump US dollars into illiquid Gulf States so that these US dollars can be recycled back into the US dollar system to compensate for the loss of oil revenues suffered by the Gulf States. In short, the US is bailing itself out, not the Gulf States as the mainstream financial press has suggested.

There is now a big debate about why the Gulf states don’t just dip into their Sovereign Wealth Funds (worth $6-trillion)? Some argue that they have debt service obligations that are correlated with dwindling oil revenues, and so they may have rising debt obligations but lack the liquidity needed to service their debts. Hence the bailout.

Sinister signal

Varoufakis sees a more sinister move: this is a signal, he argues, by the US Treasury to the incoming head of the Federal Reserve that it will be necessary for the Fed to approve in future a number of much bigger swap lines (because it can – there is no limit to how much the Fed can print) to prevent the dollar system in general, and the petro-dollar system in particular, from collapsing.

In other words, Scott Bessent – the US Treasury secretary – may be engineering another 1971 moment. If the US cannot service its debt, and if the debt is not going to be cut during election time (through the mid-term to 2028), then the only solution is massive injections of dollars via the great recycling mechanism that underpins US global hegemony.

But will the recycling mechanism work this time if less and less is traded in US dollars as the BRICs Plus rise, and more and more energy is produced without having to burn more and more oil (now at 100 million barrels per day and declining)? China will play a key role. It has the largest renewables-based electricity generation system, and the largest cash surplus.

Will it continue to electrify everything and reduce dependence on oil? Will it continue to expand its yuan-based cross-border trade? And will Trump ask Xi Jinping to help save the US dollar by increasing rather than decreasing purchases of US Treasury Bonds at the US-China Summit, and what will Xi Jinping want in return? And will China continue to buy oil from Iran in yuan?

Nothing is certain in an increasingly unstable geopolitical environment. But I suspect the answers to most of these questions will be yes. More cross-border trade will be in US dollars, especially as Chinese refinances in yuan more dollar-denominated African loans at lower interest rates. As oil prices rise and stay high for long enough, the energy transition will accelerate.

Will Xi Jinping agree to prop up the US dollar by buying more Treasury Bonds when he meets Trump? Probably (and most likely not as much as Trump wants), but in return Trump may well have to agree that the Chinese can have a free hand to increase yuan-based cross-border trading and financing. And yes, this will mean China will want to continue to buy more and more oil in yuan from whomever it wants, in particular Iran and the Senegalese.

A multipolar multi-currency world

Where does this all end up? A multipolar multi-currency world. And how does this affect SA? SA benefits from being a key member of the BRICs Plus club that will be an important vehicle for expanding the yuan-based payments system and a low tariff regime for African countries.

This could help South African trade and dilute its US dollar dependency, which might be useful if Trump gets even more nasty. As after all previous oil crises, the gold price will rise (not initially, but over the medium to long term).

But if SA wants to position itself in this new world, we will have to see far more clearly what is unfolding on the global stage and how, as I argued elsewhere, this is affecting our own financial systems. De-dollarisation and the energy transition are the twin-drivers of a new world, and China is at the centre of both.

This may not be a better world, but it certainly creates more opportunities for small African countries like ours if we open our eyes wide enough and stop favouring investments that subvert our sovereignty when we have plenty of rand to redirect into fixed assets. DM