After War on Iran, is US Protection Still Worth the Cost for the Gulf?

By Al Mayadeen English

Gulf states question the US security umbrella as the Iran war exposes risks to energy infrastructure, accelerating shifts in the petrodollar system.

Gulf states are increasingly confronting a fundamental question as the war on Iran rages on: Is reliance on the US security umbrella still worthwhile?

Since US and Israeli attacks on February 28, US military bases and assets across the Gulf have been targeted in retaliatory operations using missiles and drones, damaging energy infrastructure, disrupting economies, and exposing the limits of Washington's so-called protection. 

The petrodollar bargain

For decades, the Gulf-US relationship rested on an implicit bargain: US protection in exchange for Gulf energy, oil priced in dollars, and the recycling of hundreds of billions of dollars from petrodollars back into US arms, technology, and financial markets. This framework, established in the 1970s, has been central to US-Saudi relations and underpins the dollar’s role as the global reserve currency.

Gulf Cooperation Council (GCC) nations, including Saudi Arabia, the UAE, Qatar, Oman, and Bahrain, peg their currencies to the dollar, supported by reserves estimated at around $800 billion. Sovereign wealth funds in the region manage more than $6 trillion, largely invested in US-heavy assets such as stocks, bonds, and private equity. Saudi and UAE funds alone hold nearly $250 billion in US Treasury securities, with additional billions in global dollar deposits.

Three strains on the petrodollar system

The petrodollar relies on three pillars: Washington’s dependence on West Asian oil, pricing of oil in dollars, and Gulf confidence in US security. All three are under pressure:

Reduced US dependence on Gulf oil as America becomes a net energy exporter.

Erosion of dollar-denominated oil trade, with China, Russia, and Iran pursuing alternative currencies.

Questioned US security guarantees, highlighted by the Iran war and attacks on Gulf energy infrastructure.

Gulf states look east

Economists suggest the war could accelerate a shift toward Asian partners. Former Goldman Sachs economist Jim O’Neill argued that Gulf nations may increasingly turn to China, India, and other major oil consumers, as “aligning with the US no longer guarantees security.”

Saudi Arabia now sells four times as much oil to China as it does to the US, according to Deutsche Bank.

Moreover, Deutsche strategists note the petrodollar regime was already under strain: most West Asian oil flows to Asia, sanctioned Russian and Iranian oil trades in non-dollar currencies, and Saudi Arabia has been localizing defense industries and experimenting with non-dollar oil payments. The war may intensify these trends, potentially forcing Gulf states to liquidate dollar assets to cover economic damage.

Recently, a senior Iranian official said Iran is considering allowing a limited number of Strait of Hormuz oil tankers to pass through the strategic waterway, provided that the oil cargo is traded in Chinese yuan.

Long-term implications

The offensive could accelerate a transition from a petrodollar-dominated system toward a mix of petroyuan, petrorupee, or petroeuro reserves. A global shift away from fossil fuels would further challenge petrodollar dominance.

Deutsche Bank warns that West Asia’s strategic importance to the dollar’s reserve status remains significant, and the war could test the foundations of the system. Reports of oil shipments possibly using the yuan through the Strait of Hormuz underscore the long-term economic ramifications of the war.

Gulf investors and policymakers are now closely watching the war’s trajectory, knowing that its outcome may reshape financial, trade, and military alignments for decades.