Can Iran Blow Up the (Petro) Dollar?

How a military defeat in the Gulf might end American hegemony

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Recently there has also been growing concern about a potential loss of confidence in U.S. Treasuries and the U.S. dollar. Some have even argued that we might face a new “Bretton Woods”–type scenario, similar to when the United States effectively defaulted on its gold obligations, terminating the convertibility of dollars into gold.

I do not think we face such a risk. First of all, we are no longer on a gold standard. There is no gold convertibility and no fixed exchange rate to preserve.

That does not mean that dollar hegemony cannot collapse. It is an institutional arrangement created by humans, and like all human institutions it will eventually come to an end. The question is what could trigger a loss of confidence in the dollar and weaken U.S. monetary hegemony.

I think that, in the current situation, the major risk would be a geopolitical blunder by the United States.

The Syracuse Moment

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Let us consider the worst-case scenario for the United States: that it loses a war with Iran, as Prof. Jiang has predicted. What would that mean for the U.S.? It is difficult to say.

First of all, the objectives of the United States in this war are not entirely clear. Different members of the current U.S. administration have expressed different goals since the conflict began. The goalposts have shifted from stopping nuclear enrichment, to dismantling Iran’s ballistic missile program, to pursuing regime change, and even to demanding total surrender (whatever that means). Regime change appears extremely difficult to achieve without a ground invasion.

But putting that aside, let us assume that, whatever the objectives are, the United States ultimately fails to achieve them. What would such an outcome imply for the United States and its ability to project power?

Reflecting on this situation brought to mind something that happened a long time ago. Toward the end of the fifth century BCE, the Mediterranean was the stage of the Peloponnesian Wars among the Greek city-states, where Athens and Sparta contested hegemony over Greece. In 415 BCE, Athens decided to launch an invasion of Syracuse, a Spartan-allied city in Sicily. This expedition would later become known as the Sicilian Campaign.

Around 130 ships sailed toward the Italian coast. The expedition was supposed to extend Athenian maritime power into the western Mediterranean and counterbalance both Sparta and the threat from (interestingly) Persia in the east.

Despite Athens’ military might, however, the Sicilian Campaign turned into a catastrophic disaster. Its army was effectively wiped out, destroying Athens’ great armada and significantly weakening its role as a regional hegemon, both militarily and financially.

Many historians consider the Sicilian Campaign to be the strategic mistake that marked the beginning of Athens’ decline.

A risky gamble for the US

The United States has suffered major military setbacks before without losing its economic dominance. Neither the defeat in Vietnam nor the costly and prolonged aftermath of the 2003 Iraq invasion—despite casualties and rising public debt—fundamentally weakened America’s hegemonic role in the global economy.

So why would this time be different?

There are several reasons, but I would focus on one aspect.

The Middle East today is not Vietnam in the 1970s. It is a crucial node of the global economy and the centre of the so-called “petrodollar system.” The latter refers to the deal struck between the United States and Saudi Arabia in 1974, in which the Saudi monarchy agreed to price its oil in U.S. dollars in exchange for American security guarantees. Arab countries would then recycle their dollar surpluses—generated from oil exports—into investments in the United States.

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To some extent, this arrangement implicitly extends to the GCC countries, the oil-rich monarchies of the Gulf such as Qatar and Bahrain. All of them host several U.S. military bases, American personnel, and American military assets such as missile defence systems.

Since the war began on February 28, however, Iran has retaliated against these countries, causing substantial damage to their economies. Furthermore, Iran has managed to close the Strait of Hormuz, dealing an even harsher blow to the economies of the region. The longer this war drags on, the greater the pain (both physical and economic) that these countries will endure. And who knows how long it will take to recover once the conflict is over.

Needless to say, the Gulf countries are not particularly happy with the Americans and the Israelis for starting this war.

The situation reportedly pushed a Saudi official to publicly complain about the United States on Qatar’s Al Jazeera network:

“The United States abandoned the Gulf states and redirected its air defence to protect Israel. They left all the Gulf states that host American military bases at the mercy of Iranian strikes.”

It now seems that the Gulf states might actually be reconsidering their investment strategies abroad—particularly in the United States—amid the financial stress caused by Iranian attacks. Allegedly many of these investments were AI-related and could have repercussions for U.S. tech companies.

Public criticism of U.S. conduct also came from UAE billionaire Khalaf Ahmad Al Habtoor, who complained about the United States and Trump directly in an open letter, including remarks such as: “Who gave you permission to turn our region into a battlefield?”

But there is an even worse possibility.

What if the war continues and the United States runs short of ammunition (they are already moving missiles from out of Korea to move them to the Middle East) while Iran keeps pounding Gulf infrastructure? What if these countries begin to realize that U.S. security guarantees—already incapable of preventing Iranian retaliation—are not as reliable as once believed? Nevertheless, who would have imagined that Dubai and Doha would have become war theatres just a week ago?

And what if the United States ultimately withdraws from the Middle East if the campaign fails to go as Trump and Israel expected?

It is hard to see then how the petrodollar system would continue without American security guarantees and the empire capability to project its military might.

Conclusion

Obviously, I am no historian or military expert, and much of this remains speculation. Much will depend on how the conflict unfolds, and in any war it is difficult to make predictions of this kind. However, given the importance of the region for dollar hegemony, it seems uncontroversial to say that the United States is playing a very risky game.