By Dr. Samila Amanyraoufpoor
Program Chair and Core Faculty, MBA & BA Programs
Over the past several weeks, I have received a recurring set of questions from students, colleagues, and professional peers regarding rising gasoline prices, U.S. oil production, and the potential implications of Middle Eastern tensions on the U.S. dollar.
These are not isolated concerns—they reflect a broader need to understand how energy markets, geopolitics, and currency systems intersect in today’s global economy. This brief analysis aims to unpack these dynamics in a clear, structured, and accessible way.
Why Are Gasoline Prices Rising Despite High U.S. Oil Production?
At first glance, it may seem contradictory: the United States is one of the world’s largest oil producers, yet consumers still experience rising gasoline prices during geopolitical crises. The answer largely relates to the cost of production.
Estimated production costs per barrel illustrate a significant disparity:
- Saudi Arabia: $3–$10
- Qatar: $5–$10
- Kuwait: $8–$10
- Iran: $10–$15
- Iraq: $10–$11
- United States: approximately $30–$60+
The primary driver of this difference is geology.
In the Middle East, oil reserves are typically:
- Highly concentrated
- Located near the surface
- Naturally pressurized
These characteristics allow for low-cost extraction.
In contrast, U.S. oil production is largely derived from shale formations, requiring hydraulic fracturing (fracking) and horizontal drilling, technologies that are capital-intensive and raise production costs significantly.
However, the more critical point is this: oil is priced globally. Even when produced domestically, its price reflects global supply-demand conditions, geopolitical risks, and market expectations. When tensions escalate in key regions such as the Middle East, markets incorporate a risk premium, leading to immediate price increases worldwide—including in the United States.
A related clarification: while the U.S. leads in production, it does not hold the largest proven oil reserves—Venezuela does. The short answer is possibly, but only slightly, unless many other countries follow suit.
Could the U.S. Dollar Weaken if Oil Is Traded in Chinese Yuan?
Another question I have frequently encountered is whether the U.S. dollar could lose value if countries—particularly Iran—shift oil transactions into Chinese yuan.
The short answer: possibly, but only marginally unless a broader structural shift occurs.
To understand why, we must revisit the historical foundations of the modern global financial system.
From Bretton Woods to the Petrodollar System
In 1944, after the World War II ended, the Bretton Woods Agreement established the U.S. dollar as the central anchor of global finance. Even after the system formally ended in 1971, the dollar retained its dominance due to institutional strength and economic scale.
A critical turning point came after the 1973 oil crisis. In 1973, following the Yom Kippur War, Arab oil-producing countries imposed an oil embargo against nations that supported Israel, particularly the United States. Oil prices quadrupled, increased from about $3 per barrel to roughly $12 per barrel within a few days.
In 1974, the United States and Saudi Arabia (then the largest oil exporter) reached a strategic agreement:
- Oil would be priced in U.S. dollars
- Oil revenues would be reinvested in U.S. financial assets (particularly Treasury bonds)
As other OPEC members followed suit, this arrangement evolved into what is now known as the petrodollar system.
The implications were profound: global demand for oil translated directly into sustained demand for U.S. dollars, reinforcing its role as the world’s dominant reserve currency.
What Is Changing Today?
Recent tensions in the Strait of Hormuz, coupled with ongoing sanctions, have led Iran to explore alternative transaction mechanisms, including Chinese yuan and, in some cases, cryptocurrency.
From an international economics perspective, currency value is driven by demand. If a significant portion of global oil trade were to shift away from the dollar:
- Demand for dollars could decline
- Demand for alternative currencies, such as; Chinese Yuan could increase
This could exert downward pressure on the U.S. dollar.
As a result, any impact on dollar valuation is likely to be incremental rather than transformative in the short term.
A Strategic Note on the Strait of Hormuz
The Strait of Hormuz is one of the most strategically critical chokepoints in global trade. Under international maritime law, it is classified as an international strait, allowing free transit passage for vessels without tolls.
This differs from constructed waterways such as the Panama or Suez Canals, where fees are required.
Nevertheless, geopolitical tensions can introduce security risks, informal constraints, or temporary disruptions, all of which contribute to market uncertainty and price volatility.
