The US dollar-dominated global oil trading system is being tested by the Iran war and the closure of the Strait of Hormuz, as governments in major consuming nations turn to increasingly opaque deals with Tehran and Gulf producers to secure supplies.
Since the outbreak of the war on February 28, roughly a fifth of global oil supplies from the Gulf have been disrupted, dealing a tough blow to economies, particularly in Asia, which depends on the Middle East for about 60% of its imports. With the Hormuz blockade now in its 13th week, there are growing signs that major Asian importers are adapting to the new reality by striking direct arrangements with Gulf producers, often with Tehran’s consent, to allow vital flows of crude, chemicals and fertiliser through the Strait.
In recent days, several oil tankers have crossed Hormuz, frequently sailing with their tracking systems switched off to avoid detection, following direct contacts between leaders in the purchasing countries and Iran.
Last week, a Panama-flagged tanker carrying 2 million barrels of Kuwaiti and Emirati crude passed through the Strait en route to Japan following discussions between Prime Minister Sanae Takaichi and Iranian President Masoud Pezeshkian.
Iran has also struck arrangements with China, Iraq and Pakistan to move oil and liquefied natural gas out of the Gulf. The precise structure of these bilateral and trilateral deals remains largely opaque. But it is highly likely that many are being settled outside the traditional oil trading system, either through currencies other than the US dollar or through informal barter arrangements.
Regardless of whether these trades include explicit transit fees to Tehran – something Tokyo has denied – the pattern reinforces Iran’s de facto control over traffic through the critical waterway.
Iran seeks to enshrine this influence in any future settlement with Washington, a demand President Donald Trump has firmly rejected.
However when the standoff is ultimately resolved, the current disruption is likely to leave a lasting imprint on oil trade patterns.
Crossing Hormuz is now likely to carry a persistent geopolitical risk premium. That will embed higher costs into Middle East crude, forcing importers to rethink supply security.
In turn, that may encourage more direct, government-backed deals with regional producers to clinch supplies, create pricing mechanisms that insulate buyers from volatility and help secure transit through Hormuz.
Signs of that shift are already emerging. Indian Prime Minister Narendra Modi visited the United Arab Emirates on Friday to discuss long-term supply agreements and expand strategic storage. The timing of the trip — in the middle of a regional war — underscores the urgency of New Delhi’s situation and may signal a broader turn toward bilateral energy diplomacy across Asia. “In the current circumstances, there is every reason to expect China, India, Japan, South Korea, and other import-dependent countries to extend the network of bilateral relationships they already have with Gulf states – including a post-war regime in Iran – and with other oil and gas exporters around the world,” consultancy Dragoman said in a note on Friday.
These evolving trade patterns add to the slow erosion of the dollar’s dominance in global oil trade. Modi’s talks in Abu Dhabi followed a 2023 agreement between India and the UAE to settle bilateral trade in rupees and dirhams rather than dollars, part of a broader push by emerging economies to diversify their payment systems.
Today’s oil trading architecture was designed in the 1970s and 1980s to avoid such fragmentation. The creation of crude futures markets in New York and London brought transparency and liquidity to a system previously dominated by producer-set prices.
Crucially, it also entrenched the US dollar as the system’s core currency.
The dominance of the “petrodollar” gave Washington unparalleled leverage over global finance, enabling it to impose sanctions that effectively exclude countries, companies and individuals from the international trading system. Over recent decades, the US has dramatically expanded the use of sanctions, targeting countries such as Iran, Venezuela, Russia and China in pursuit of geopolitical and economic objectives. Those measures drove the development of a vast oil trading network that bypassed the dollar and Western shipping.
The risk of falling foul of US sanctions prompted major emerging economies to explore alternative trading mechanisms. So far, those efforts have had only limited success: even today, just 10% to 20% of global oil trade is estimated to occur in non-dollar currencies.
But the shock of the Iran war and the partial shutdown of one of the world’s most important energy arteries, which has forced buyers to rethink their energy security strategies, could accelerate that shift. With Asia accounting for over a third of global oil consumption and more than half of global imports, any move toward bilateral, state-driven trading relationships in this region would push the market toward a much more fragmented global energy trading system. To be sure, the Middle East supply disruption has also reinforced the US as the world’s premier oil and gas producer, and Washington is likely to remain dominant in the global economy for decades to come. No single currency is expected to take the dollar’s place.
But the fallout from the Iran war could nevertheless lead to the fragmentation of oil pricing, reducing transparency and weakening Washington’s grip over the financial architecture that has underpinned the global oil trade for decades.