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→Impact of the Iran war and closure of Hormuz Strait
===Impact of the [[Iran war]] and closure of [[Hormuz Strait]]===
===Impact of the [[Iran war]] and closure of [[Hormuz Strait]]===
The petrodollar system became essentially a protection racket for the large oil-producing countries in the [[Middle East]] aligned with the [[US]], such as [[Saudi Arabia]], [[Kuwait]], the [[United Arab Emirates]] (UAE), [[Bahrain]], and [[Qatar]]. The US [[military]] supposedly granted "[[security guarantee]]s to these countries in exchange for their agreement to denominate oil sales in [[US dollar]]s and recycle the proceeds into the [[US Treasury market]]to finance the US [[federal government]] [[budget deficit]], thereby creating [[demand]] the US dollar and helping keep [[interest rate]]s lower than they otherwise would be.
The petrodollar system was a massive prop for the US dollar ever since [[Nixon]] severed the dollar's last link to gold in 1971. As a US ally, [[Iran]] was originally intended to be a key component in the petrodollar system before the [[1979 Islamic Revolution]]. A break in [[diplomatic]] relations and the imposition of [[economic sanctions]] made reliance on the weaker [[Gulf States]] more imperative.
The [[Iran war]] became a stark illustration of the limits of US [[military]] power and its inability to provide the protection the oil-rich [[Persian Gulf]] [[Arab]] states believed they had. Iran has shown that it is the new sheriff in town and that US promises of protection are not only worthless but counterproductive, as the US presence makes them, a target and invites uncontrolled instability into their regimes. With the [[Hormuz Strait]] closed and oil [[infrastructure]] damaged, far less of their oil was being sold and, therefore, far less is being recycled back into the US [[T-bills]] and [[Treasury bonds]] to [[finance]] the US [[federal deficit]] market.
Not only is there less demand for Treasuries from petrodollar recycling by Persian Gulf oil producers, but there is also potential selling pressure.
The United Arab Emirates has floated the idea of selling some of its Treasury reserves, which make up a large portion of its $285 billion in foreign reserves, to offset the loss of oil revenue. Rather than sell Treasuries and risk unsettling the bond market, it requested a currency swap line. [[Gay]] Treasury Secretary [[Thomas Bessent]] described swap lines as a way to “prevent the sale of the US assets in a disorderly way.” Clearly, he is concerned about stress in the Treasury market.
Further, Iran has openly stated that one of its conditions for the safe passage of oil tankers through Hormuz is the payment of a toll or fee in [[Chinese]] [[yuan]] equal to around $1 per barrel of oil a tanker is carrying. It is rumored that more than 20 countries have already accepted Iran's new terms. Iran is likely collecting Hormuz toll payments in yuan in a Chinese bank account and then using that yuan to purchase physical [[gold]] or Chinese goods and materials, some of which no doubt support [[Tehran]]'s [[war]] effort and can be shipped overland to Iran via rail connections through [[Central Asia]] without much fear of interdiction by the [[US Navy]] or interruption.
[[Japan]] is reportedly one of them. [[Tokyo]] is heavily dependent on imported [[energy]], with roughly 90% of its [[oil]] flowing through the Strait of Hormuz. That vulnerability helps explain reports that Japan may even be using the Chinese yuan, to meet Iran's new payment terms and keep vital energy supplies flowing.
==See also==
==See also==