Prices at the pump skyrocket as soon as a conflict flares up in the Middle East. But behind those rising oil and gas prices, a much larger shift is taking place. While the world watches the geopolitical tensions surrounding Iran, the economic balance of power is also changing. The dominance of the U.S. petrodollar is slowly crumbling, while China is gaining ground more and more emphatically with the yuan. According to Hans van Cleef, this marks the birth of the “electroyuan.”
Ever since the U.S. and Israel resumed their attacks on Iran and the Strait of Hormuz was closed, oil and gas prices have once again taken center stage. Qatar’s gas exports also came to a temporary halt. The economic consequences are being felt worldwide. But behind this energy crisis, another development is unfolding: the changing role of the United States in the global economy.
Anyone who buys a barrel of Brent crude still pays in U.S. dollars. The same is true for a large portion of international trade. The dollar has been the linchpin of the global financial system for decades. The foundation for this was laid with the Bretton Woods system in 1944. Even after the gold standard was abandoned in 1971, the dollar remained the dominant global currency.
This was mainly due to the rise of the petrodollar. In the 1970s, oil-producing countries agreed with the U.S. to trade their oil exclusively in dollars, in exchange for, among other things, military protection. Because the whole world needed oil, demand for dollars remained enormous. Moreover, oil revenues were often reinvested in U.S. Treasury bonds.
“The combination of high government debt, rising inflation, trade wars, and political pressure on the U.S. central bank is eroding confidence in the dollar”
As a result, the United States benefited for many years from low financing costs, a strong credit rating, and the dollar’s virtually unassailable position. Even today, approximately 58% of global foreign exchange reserves are held in dollars, and the currency is involved in about 88% of all foreign exchange transactions.
However, that long-standing position is coming under increasing pressure. The combination of high government debt, rising inflation, trade wars, and political pressure on the U.S. Federal Reserve is eroding confidence in the dollar. The currency is also increasingly being used as a geopolitical tool, for example through sanctions and trade tariffs. This is driving other countries to reduce their dependence on the U.S. financial system.
China has made the most progress in this area. The other BRICS countries are also looking for alternative payment systems to reduce their dependence on the dollar. At the same time, the global energy system is also shifting. While the petrodollar rose to prominence thanks to oil, China is growing alongside the energy transition.
“China plays a key role in virtually every aspect of the energy transition. As a result, the use of the Chinese yuan is also on the rise.”
China now dominates the extraction and processing of critical raw materials and produces a large share of the world’s solar panels, batteries, wind turbines, and electric cars. China plays a key role in virtually every stage of the energy transition. As a result, the use of the Chinese yuan is also on the rise. More than a third of China’s trade in goods is now settled in its own currency.
Whereas oil has driven demand for dollars for years, the energy transition could eventually have the same effect on the yuan. For the time being, the yuan will not replace the dollar as the dominant global currency. Confidence in the U.S. financial markets is still too strong for that to happen. But the world is indeed moving toward a system with multiple economic power blocs. The “electroyuan” is therefore not a new global currency, but it is a sign that the balance of power is shifting.
This also has implications for the stability of the financial system. Much of international trade, lending, and foreign exchange reserves are still based on the dollar. When confidence in the dollar wanes, the risks of financial shocks also increase. Normally, such a shift in power would take place over decades. However, Trump’s economic and geopolitical policies appear to be significantly accelerating that process.
“What about the euro? Europe remains economically important, but political divisions and slow decision-making limit its geopolitical influence.”
A stronger yuan could offer a partial alternative in this regard. Just as the United States has benefited for decades from the dollar’s international role, China will increasingly benefit from the growing importance of its own currency. At the same time, this also makes the country more vulnerable to the same financial risks that currently affect the U.S. in particular.
What about the euro? Europe remains economically important, but political divisions and slow decision-making limit its geopolitical influence. The euro will therefore likely remain primarily a supplementary reserve currency, alongside the Japanese yen, the Swiss franc, and possibly even Bitcoin.
Meanwhile, dependence on China continues to grow—not only in the production of clean technology, but also in the financial settlement of those transactions. That is why I foresee one major shift in the coming decades: from the petrodollar to the electroyuan.
Hans van Cleef is Head of Energy Research at EqoLibrium (this column was written in a personal capacity and was previously published on Studio Energie Opinie)
