Inside today’s Daily Journal…

Editor’s note: Although Erez Kalir ordinarily focuses on technology, blockchain, and biotech issues in Porter & Co.’s Tech Frontiers, Porter turned over the Journal to him today so Erez could tell the story of the single most important thing in the entire economic landscape. And while the war in Iran brings this topic into focus – the slow collapse of this trend that kicked off more than 50 years ago is starting to get real…

In 1974, U.S. Secretary of State Henry Kissinger quietly closed what is arguably the most consequential deal in modern financial history. There was no signing ceremony, no front-page Wall Street Journal story, almost no paper trail. But the deal would fundamentally shape the global economic order for the next half century.

To understand the deal’s significance, we have to begin in 1971 – when President Richard Nixon shocked the world and abruptly closed the “gold window.” Nixon’s surprise announcement that U.S. dollars would no longer be redeemable for gold at a fixed price shattered the Bretton Woods agreement, which had governed international currency exchange since 1944. And it left global economic leaders facing an uncomfortable question: What, exactly, backed the dollar?

The implicit answer was “trust”… but Kissinger knew America needed a better answer. In the early 1970s, the U.S. economy found itself reeling from the OPEC oil embargo and its aftereffects – a quadrupling of oil prices, stagflation, and a cratering stock market. Asking the world to “trust” the durability of the U.S. economy and the dollar wasn’t going to cut it.

So Kissinger and then-Treasury Secretary William E. Simon devised an elegant, ruthless solution. In the summer of 1974, they traveled to Jeddah to finalize an understanding between Saudi Arabia and the United States that transformed the two countries into long-term strategic partners. The terms of the deal were simple: the U.S. would guarantee Saudi Arabia’s security with military protection and advanced equipment for Saudi oil fields. In exchange, Saudi Arabia would price its oil exports exclusively in U.S. dollars and reinvest a significant part of the revenue into U.S. Treasuries.

The Kingdom of Saudi Arabia was the undisputed leader of OPEC – so when it priced oil exclusively in dollars, other OPEC nations followed.

And just like that, a new global monetary order was born.

To understand the central role the petrodollar agreement has played in America’s economic dominance over the past half century, we have to understand how the system worked.

Much like “the spice” in the science fiction Dune universe, oil isn’t optional in the real world. Every economy – big or small, advanced or developing – depends on it. So when oil is priced in dollars, every country in the world needs dollars.

German manufacturing company hedging its energy costs? Gotta have dollars. Japanese automaker buying Saudi crude? Gotta have dollars. Indian petrochemical refinery? Gotta have dollars.

The 1974 petrodollar agreement created something extraordinary: structural, inescapable demand for the U.S. dollar at massive scale.

But the system’s true genius is what came next: Oil exporters such as Saudi Arabia accumulated trillions in dollar surpluses from selling oil. Then they recycled those dollars back into U.S. Treasuries.

The result was a self-reinforcing loop:

Demand for oil → Demand for dollars → Demand for Treasuries → Lower U.S. borrowing costs → More U.S. spending → More demand for oil → More demand for dollars

At its peak, the petrodollar system generated over $2 trillion per year of forced demand for dollars. This demand, in turn, has allowed the United States to do something no other country in history has ever done as successfully: spend beyond our means, indefinitely.

As the Fed printed dollars to finance deficits run by the U.S. Treasury, Americans haven’t had to suffer anything close to the full inflationary cost – it’s been significantly absorbed by the rest of the world, because the world has needed dollars.

This ability to print dollars for our benefit but have the rest of the world absorb the inflation is exactly what former French Finance Minister Valery Giscard d’Estaing infamously called America’s “exorbitant privilege”… and what former U.S. Treasury Secretary John Connally meant when he tartly remarked to European leaders, “The dollar is our currency, but it’s your problem.”

For decades, the petrodollar system was unassailable. But recently, several developments have created big cracks in its foundations.

First, China’s Premier Xi Jinping has been much more deliberate in leveraging his country’s growing strategic advantages to undermine the dollar’s dominance. Xi’s “Belt and Road Initiative,” for example, has dispensed over $1.3 trillion in infrastructure investments and lending to emerging economies over the past decade – and much of this capital is increasingly denominated in renminbi (“RMB”), China’s currency.

The same goes for the critical goods and resources over which China has developed a strategic stranglehold. Over a period of decades, China has carefully built a virtual monopoly over essential infrastructure inputs such as advanced solar panels, batteries, wind turbines, and rare earth minerals. Increasingly, its sales of these inputs to the world are denominated in RMB, not dollars. And China is leveraging its control of these essentials to create inescapable RMB demand in much the same way demand for oil in the 1970s created inescapable demand for dollars.

Second, Saudi Arabia itself has begun to hedge its commitment to the 1974 petrodollar understanding. Although most of the Kingdom’s oil sales are still dollar-denominated, it has abandoned the dollar’s pricing exclusivity. Notably, Saudi Arabia’s single largest oil customer today is China – and its oil sales to China are increasingly transacted in RMB, not dollars. The Kingdom has also flirted with membership in BRICS, the coalition of major emerging economies whose main purpose is to create an alternative to the U.S. and U.S.-led, dollar-based institutions such as the International Monetary Fund (“IMF”).

Finally, the G7’s February 2022 decision to freeze Russia’s $300 billion in central bank reserves in response to the Ukraine War was a huge, under-remarked milestone. Those reserves were held in dollars – not, say, in gold. Freezing Russia’s funds for its Ukraine aggression inadvertently sent a message to every central bank in the world. The message said: “Your dollar-denominated central bank reserve assets that you thought were yours? Those can be frozen and even seized if the U.S. gets angry at you.”

It’s not surprising that since this February 2022 milestone, global central banks have been on their largest gold-buying spree in recorded history, as they seek to quietly swap out $6.8 trillion in dollar-denominated reserve assets for something the U.S. can’t freeze as easily – a vault full of gold on their own territory.

Ernest Hemingway famously wrote that a man goes broke “gradually, and then suddenly.” So it may be with the breaking of the petrodollar order. And years from now, we may look back on the current Iran War as the final straw that broke it.

Let me explain…

As everyone who has glimpsed at the news knows, the Iran War has caused the closure of the Strait of Hormuz, through which about 20% of the world’s oil transits. Daily oil flows through the Strait have fallen from approximately 20 million barrels per day to virtually nothing, driving the price of Brent crude above $100 per barrel. AAA confirms that the price of gasoline in the U.S. has risen over 34% since the war began.

But amid this closure, one category of oil-bearing vessels continues to transit the Strait smoothly: Chinese shadow-fleet tankers carrying Iranian crude – which China paid for in RMB not dollars, and settled using its own bespoke CIPS payment system, not the U.S.-backed, dollar-based SWIFT.

So while the U.S., Europe, Asia ex-China, and the rest of the world wait for a resumption of dollar-based oil flows through the Strait, China is providing a striking, real-time demonstration to anyone paying attention that RMB-based oil is moving along just fine.

This scenario is exactly what the petrodollar agreement was meant to prevent – the emergence of a post-dollar energy system, and one that is proving with every passing day that it can function at scale while the dollar-based incumbent has broken down.

U.S. Treasury Secretary Scott Bessent is one of the most sophisticated financial actors in the world. A hedge fund billionaire who apprenticed under two of the greatest investors of all time, George Soros and Stan Druckenmiller, Bessent was an integral part of the small team that “Broke the Bank of England” on September 16, 1992 – netting the Soros Quantum Fund a $1 billion profit in a single day betting aggressively against the British pound. This is a man who forgets on a nightly basis more about global currency regimes than most of us will know in a lifetime.

The uncomfortable truth is this: Bessent understands exactly the threats to the petrodollar order and the dollar’s dominance. And like Kissinger and Simon in the early 1970s, he is working concertedly, with all deliberate speed, to build a replacement that safeguards the dollar’s continued dominance before a collapse of confidence can ensue.

It’s not clear if he’ll succeed…

For investors, this story is arguably the single most important thing to follow and understand in the entire economic landscape.

Although I ordinarily focus on tech and biotech, this is such an important story that I’ll be writing about it in detail in an upcoming issue of Tech Frontiers – and, as that issue will lay out, technology is actually an essential part of this story. I’ll also be sharing exactly how I think investors should position themselves to create both portfolio protection and upside convexity, no matter how the story ends.

For those who do not yet subscribe to Tech Frontiers – and who would like to see next week’s recommendation as well as the full list of Erez’s recommendations, some of which have risen more than 2x – click here to learn more.

The most interesting, important sequel to the petrodollar order is being written now, before our very eyes. How are you preparing for it?

Tell us what you think: [email protected]

Erez Kalir
Berkeley, California

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1. A highly reliable predictor of stock market returns has never been more bearish. The average U.S. household now allocates 55.1% of its investment portfolio to equities – a record high, more than two standard deviations above the 80-year average of 36.3%. This indicator, which measures retail investor enthusiasm on a contrarian basis, is highly correlated with the S&P 500’s subsequent 10-year real returns. This isn’t a short-term timing signal, but based on history, U.S. stocks are likely to trade much lower in real terms (after inflation) a decade from now.

2. Driverless trucking in the Lone Star State. Autonomous freight company Aurora Innovation (AUR) plans to expand from a 10-truck driverless fleet to roughly 200 trucks by the end of 2026. Uber Technologies (UBER) remains Aurora’s largest shareholder, with 325 million shares (about 17% of total) worth approximately $1.25 billion. Aurora’s scaling effort leverages Uber Freight’s digital marketplace to maximize fleet utilization. Management of the Texas-based company expects to produce an $80 million annual revenue run-rate… If things go as mapped, both Uber and Aurora will likely benefit greatly.

3. Fannie Mae goes crypto. Mortgage-finance giant Fannie Mae (FNMA) will begin accepting crypto-backed mortgages through a new product from Better Home & Finance (BETR) and Coinbase Global (COIN). Instead of selling Bitcoin or digital assets to make a cash down payment, borrowers can take a loan against their crypto holdings – which avoids triggering capital gains taxes. The interest rate runs up to 1.5 percentage points above standard Fannie rates. A 2025 Redfin survey found nearly 13% of millennial and Gen Z buyers already sold crypto to fund down payments. This is another sign that digital assets are slowly but surely merging with the traditional financial system.

We started off 2026 in Complete Investor by referring to energy as “the single most important trend shaping the financial markets.” Among the many energy recommendations playing out that prediction is nuclear-reactor and components builder BWX Technologies (BWXT) – up more than 100% over the last year.

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