Contrary to the belief in continuous wealth accumulation, the massive petrodollar reserves built by Gulf states in the 1970s were largely depleted by the mid-1990s due to production cuts and price collapses. The petrodollar phenomenon is highly cyclical, not a one-way accumulation of capital.
Some countries are reducing holdings of US government bonds, but they are often rotating that capital into US equities. Since both are dollar-denominated assets, this trend represents a shift in risk appetite and asset allocation, not a genuine move away from the US dollar system itself.
Despite political tensions, China's policy of managing its currency exchange rate compels it to intervene in markets, often buying hundreds of billions of dollars a month. This makes China an unintentional, yet massive, force reinforcing the US dollar's global role, not dismantling it.
Despite a massive physical interruption in oil supply (10-15% of global trade), the price reaction in futures markets has been surprisingly small. This is because markets are balancing the immediate shortage against the potential for a well-supplied market in the future if geopolitical tensions ease.
To fund its ambitious domestic projects and international equity investments, Saudi Arabia has shifted from being a major source of global capital to a net borrower. It borrowed $100 billion in the last year, becoming the largest borrower in the emerging world and a drain on global dollar liquidity.
Despite a massive positive shock from semiconductor exports, South Korea's currency (the won) has weakened. This is partly because retail investors are taking their profits and buying US tech stocks instead of reinvesting domestically, creating capital outflows that offset the strong current account surplus.
Talk of de-dollarization ignores the reality of the U.S. current account deficit, which requires selling over a trillion dollars in financial assets annually. As long as the world buys these dollar-denominated assets (debt and equity), the dollar's dominance is structurally reinforced, not diminished.
The current oil shock primarily benefits countries like Kazakhstan, Nigeria, and North American producers, not the traditional Gulf states whose exports are physically constrained. This shifts the flow of petrodollars away from the usual recipients, creating a new set of economic winners from higher energy prices.
Counterintuitively, a typical global reserve portfolio has a lower US dollar share (around 57%) than a return-seeking sovereign wealth fund's equity portfolio (up to 80%). The outperformance of US large-cap stocks makes any diversified equity strategy heavily weighted towards the dollar, independent of reserve policy.