The U.S. dollar’s entrenched role in global energy trade is encountering a structural reassessment as trading patterns and defense spending choices in Gulf oil-producing states evolve, according to a new analysis by UBS Chief Economist Paul Donovan.
Donovan notes that while an "aversion to change" still helps maintain dollar-denominated oil pricing, the economic forces that originally made the greenback indispensable are losing some of their strength. That shift comes at a delicate moment for global liquidity, as rising regional hostilities prompt major exporters to rethink how they redeploy the large sums generated by energy sales.
Why the dollar’s technical advantage is weakening
Historically, the dollar’s primacy in oil settlements had a mechanical foundation. Between the 1870s and the 1950s, the United States produced more than 50% of the world’s crude and supplied the majority of extraction machinery. Because producers bought capital equipment and related inputs priced in dollars, they had a practical need to retain dollar revenues to pay those bills.
UBS describes this as a "machinery moat" around the dollar’s role in the oil trade. That moat has thinned significantly as Gulf states broaden their supplier base for industrial goods. In Saudi Arabia, for example, the U.S. market share of total imports is now less than two-thirds of what it was only a decade ago, currently hovering around 8%. As import sourcing becomes more geographically diverse, the functional requirement to hold large dollar balances to meet equipment and supply payments is reduced.
Defense spending: the final pillar
Military procurement has long been an important backstop supporting demand for dollars in the Gulf. Budgets in the region have traditionally favored American defense contractors, which reinforced the incentive to accumulate greenbacks.
UBS cautions that if Gulf powers start to broaden their military suppliers in response to regional conflicts, that channel of dollar demand could weaken. The analysis does not suggest an immediate, wholesale shift away from dollar pricing. Instead, it highlights the plausibility of a "bifurcated" model: oil continues to be priced and invoiced in dollars while the revenues are promptly converted into other currencies.
Such a pattern - where pricing stays dollar-denominated but receipts are sold for non-dollar currencies - could exert downward pressure on the greenback without a formal re-pricing of crude.
Where higher oil revenues may be spent
For investors, Donovan identifies the critical question as not only how oil is listed in contracts but where the surge of energy income is ultimately deployed. Elevated crude prices tied to Persian Gulf instability have increased the volume of dollars entering producer coffers.
Past cycles of petrodollar recycling commonly produced a steady demand for U.S. Treasuries. UBS points out that contemporary fiscal choices by Gulf sovereign wealth funds look different: a greater tilt toward domestic infrastructure projects and purchases of military equipment from non-Western suppliers. Those allocations would likely trigger sales of dollars as the secondary trade following a spike in oil receipts.
Bottom line
UBS’s analysis frames the current moment as one in which longstanding economic incentives underpinning the petrodollar are eroding even as behavioral and contractual inertia keeps dollar pricing intact. The combination of diversified import sourcing, potential changes to defense procurement, and altered recycling preferences puts a structural test on dollar dominance in oil markets without asserting an immediate or complete abandonment of the currency.