The End Of The Petro-Dollar
In a Nutshell
UAE's withdrawal from OPEC amid the Iran war, which closed the Strait of Hormuz, threatens the 50-year petro-dollar system—originally a secret 1974 US-Saudi deal pricing oil exclusively in dollars recycled into Treasuries—exposing Gulf states' leverage via $2T+ in US assets and demands for dollar swap lines to avert sales. China gains as UAE inks $100B+ deals and pushes yuan oil pricing, accelerating dollar reserve decline (from 72% to ~50% of global FX) toward gold and yuan alternatives, while US missile shortages highlight industrial weaknesses. Potential outcomes include oil spikes to $170/barrel, global inflation from disrupted fuel/fertilizer, recession, and market corrections akin to 2000/2021 bubbles.
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United Arab Emirates, founding member of OPEC since 1967, withdrawing from OPEC and OPEC+ effective May 1st. Energy minister states it eases meeting changing demand. Major blow to OPEC during Iran war triggering global energy crisis. Markets react to supply shock: gas at pump at record high, paper price for barrel of oil over $100.
For first time in over 50 years, US threatened by close ally UAE. Days before announcement, UAE warned of using yuan or other currencies if low on dollars amid Iran war. Threat: "you guys started this war, and if we run short on dollars, we're going to start pricing our oil in yuan and potentially start selling off your assets."
US response: "Please don't do that." Scott Bessent, Treasury Secretary, offers dollar swap lines to "prevent the disorderly sale of US assets."
Mr. Secretary, can you talk about this request and whether or not uh you expect to support it? >> Many of our Gulf allies have requested swap lines. uh you would have just read about the UAE and swap lines whether it's from the Federal Reserve or the Treasury are to maintain order the in the dollar funding markets and to prevent the sale of the uh US assets uh in in a uh disorderly way. <<
GCC collectively holds over $2 trillion in US assets. US admits Gulf States hold enough to destabilize markets if sold. US provides cheap dollars via swap lines to prevent sales.
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