The Middle East is again demonstrating a lesson Washington has repeatedly resisted: possessing overwhelming power is not the same as producing a stable order. The United States-Iran war has continued for more than six months. Iran has been badly damaged, but not politically subdued. Regional shipping remains disrupted, energy costs remain elevated and Washington faces mounting international skepticism.
Reuters reported this week that the war continues without resolving the nuclear and regional-security disputes that preceded it. This is a useful moment to revisit an argument that circulated widely in 2012: that American hostility towards Iran was fundamentally about defending the “petrodollar” rather than nuclear proliferation.
The argument contained a genuine insight wrapped in an exaggerated theory. After the 1973 oil shock, the United States and Saudi Arabia certainly developed a much deeper security, economic and financial relationship. Saudi oil revenues flowed extensively into American financial assets, while Washington became central to Saudi security. That relationship mattered, but it did not create dollar supremacy by itself.
The dollar became the world’s principal reserve currency because the United States combined deep and liquid financial markets with an enormous supply of safe assets, convertibility, institutional stability and powerful network effects. Those advantages remain.
The International Monetary Fund reported that the dollar accounted for 57.13% of disclosed global foreign-exchange reserves in the first quarter of 2026. The Federal Reserve similarly identifies economic size, financial depth, openness, property rights and rule of law as central foundations of the dollar’s international role.
The predicted death of the dollar has not occurred. The more important question is what the United States does with the extraordinary power that dollar centrality confers. Because so much international banking and trade touches American institutions, Washington can impose sanctions with a reach few other states possess.
Used selectively, financial sanctions may offer an alternative to war. Used repeatedly, they create an obvious counter-incentive: states look for ways to reduce their vulnerability to American financial power. China, Russia, Iran, India and other BRICS countries have therefore experimented with local-currency trade, alternative settlement arrangements and diversification of reserves.
These developments do not amount to the creation of a new world reserve currency. They are better understood as strategic insurance. A state need not abandon the dollar to reduce the number of transactions Washington can interrupt.
The latest Middle Eastern development makes this transition especially revealing. Saudi Arabia has asked China to help restrain Yemen’s Iran-backed Houthis after their military advance increased pressure on shipping around Bab el-Mandeb. China then privately pressed Iran to exercise its influence.
Beijing has leverage because it is Iran’s principal oil customer and an important economic partner, but it also has enormous commercial and energy interests across the Gulf. For decades, Saudi security was principally associated with the United States. Riyadh is not abandoning that relationship. Its appeal to China nevertheless shows that economic influence is acquiring diplomatic weight of its own.
The emerging contest is therefore not simply between the dollar and alternative currencies. It is between different forms of power. Washington remains the dominant military actor. Beijing increasingly possesses economic leverage across relationships that span both sides of Middle Eastern rivalries.
China buys Iranian oil, trades intensively with Saudi Arabia and other Gulf Cooperation Council states, and depends upon both the Strait of Hormuz and Bab el-Mandeb remaining open. It therefore has reasons to restrain instability even while opposing important aspects of United States policy towards Iran.
This produces a paradox for Tehran as well. Iran may gain tactical leverage from influence over actors capable of threatening strategic maritime routes. But prolonged disruption also damages China, the great power on which Iran increasingly depends for oil purchases and diplomatic support.
The same contradiction confronts Washington. Sanctions may weaken an adversary today while strengthening its determination to build alternative channels tomorrow. Military power may destroy installations while generating asymmetric resistance elsewhere. Economic coercion may compel compliance in particular transactions while reducing enthusiasm for continued dependence on the system through which that coercion operates.
None of this turns Iran into an innocent party. Its regional proxies, missile capabilities and nuclear activities have generated legitimate concerns. Disruption of commercial navigation imposes costs on states that had no role in initiating the conflict. The opposite proposition must nevertheless also be tested: decades of sanctions, covert confrontation and now open warfare have not produced a durable political settlement.
Policies should ultimately be judged by what they produce, not merely by the intentions used to justify them. This is why the distinction between leadership and leverage matters.
The United States can impose costs that few countries can match. China presently possesses nothing comparable to American military or financial reach. Leadership, however, requires more than the ability to punish. It requires institutions, relationships and rules that others regard as sufficiently useful and legitimate to preserve voluntarily.
The dollar became dominant partly because the world wanted access to American markets and assets. Its durability cannot therefore be separated from confidence in the system surrounding it. The same applies to security.
A Middle Eastern order sustained indefinitely by bombing, sanctions and retaliation will encourage every important participant to seek alternative protectors, currencies, supply routes and alliances. That is not peace. It is permanent hedging against permanent insecurity.
Saudi Arabia’s turn to China for help in restraining an Iran-aligned force should therefore be read carefully. It does not announce the end of American power. It reveals a world in which military supremacy alone is no longer sufficient to organise the political and economic relationships around it.
The dollar remains dominant. American military reach remains extraordinary. China has not replaced the United States. At the same time, Beijing is being asked to mediate between interests that Washington’s military presence has not reconciled. That is the warning behind the old petrodollar argument.
The danger is not that countries will suddenly cease to use the dollar. It is that leverage may gradually replace leadership, while other powers acquire influence by becoming indispensable to relationships Washington can no longer manage alone. In a Middle East under fire, that distinction may prove more consequential than the currency in which the next barrel of oil settled.