Donald Trump’s designs on Venezuela and Greenland have sent shock waves around the world. Canadian premier Mark Carney said they have created a “rupture in the world order”, as political alliances that have held for over 80 years are thrown aside.
And as the US seeks to carve out a Western Hemispheric sphere of influence, questions about the dollar’s future as the lynchpin of the global economy are growing louder. Many other parts of the world are switching to green energy sources as renewable energy becomes cheaper than fossil fuels, and countries forced to pay back loans in dollars are eyeing alternative currency options to free themselves from the penalty of fluctuating exchange rates amid unpredictable policy shifts.
As a result, the continued relevance of the petrodollar system – in which oil is traded in dollars and guarantees demand for US currency – may be less than assured.
What is the petrodollar system?
The petrodollar system was established in the 1970s following the collapse of the Bretton Woods system and is one of the most consequential monetary arrangements in modern history.
In 1944, the Bretton Woods agreement made the US dollar the anchor of the global monetary system, pegged to gold and with other currencies fixed to the dollar. The framework aimed to provide global financial stability following the economic fragmentation of the Second World War and cemented the dollar as the world’s reserve currency.
US President Richard Nixon abandoned the gold standard in 1971 to curb inflation after foreign central banks – increasingly reluctant to hold depreciating dollars – began converting their dollar reserves into gold. The petrodollar system emerged as an alternative means of keeping the dollar as the backbone of international transactions.
The petrodollar system refers to the pact that Gulf Cooperation Council (GCC) states – including Kuwait and Saudi Arabia – made with the US, agreeing to price oil in dollars and to recycle revenues into US Treasury securities in return for military protection and sales of advanced weaponry.
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Andrés Arauz, former Ecuadorian minister and central bank director, told Green Central Banking that ramifications for the global economy were immense: “So oil and gas [are traded in dollars], but then also downstream with all the derivatives, but then also all the chemical elements derived from the oil industry and petrochemical industry. And then likewise, upstream with all the technology and inputs required to extract the oil, [it] created a dollar-denominated value chain with global and international repercussions.”
Arauz also notes that international accounting standards set by institutions like the IMF reinforce the system by requiring central banks and organisations to report reserves in dollars, solidifying the greenback as the default unit of account.
For decades, this system delivered guaranteed demand for dollars, recycled oil revenues into safe-haven US debt markets, and provided outsized geopolitical leverage to the US Federal Reserve given the need of other countries to accumulate dollars to conduct global transactions.
Fadhel Kaboub, associate professor in economics at Denison University, explains how this “exorbitant privilege” distorted the global economy in the US’s favour. “All countries operate … within a system where they have to accumulate reserves not in gold anymore but in dollars and countries that have debt, their debt is denominated in dollars. So that created a locked-in system that gives the US dollar a privilege as the dominant payment system and gives the opportunity to weaponise this system.”
The petrodollar system has also encouraged and amplified US consumption of fossil fuels and its contribution to greenhouse gas emissions. Kaboub, who is also a member of the United Nations High-Level Advisory Board on Economic and Social Affairs, says the system has “rewired” the global economy into an extractive model that promotes environmentally destructive industries.
But as decarbonisation accelerates and renewable energy displaces fossil fuel value chains, the petro-lynchpin of dollar dominance faces unprecedented strain.
Is the petrodollar in decline?
Signs of discontent are increasing, placing the dollar’s decades-long dominance under unprecedented pressure.
BRICS countries are discussing new financial mechanisms that will make trading within the bloc easier but may also reduce reliance on existing dollar-dominated channels. Both India and Brazil have denied that linking BRICS digital currencies is part of moves towards de-dollarisation, but such a move will likely cause concern in the US.
Meanwhile, European Central Bank President Christine Lagarde made headlines in May 2025 with her blunt assessment that the current global landscape presents a significant opportunity for a “global euro moment”, as investors “unsettled by unpredictable US economic strategies” increasingly reduce their exposure to dollar-denominated assets.
These developments reflect deeper structural shifts. The dollar’s share of global reserves has declined from 71% to 56.3% since 2008, with central banks purchasing over 1,000 metric tons of gold annually for three consecutive years. China slashed its US Treasury holdings from US$1.3tn in 2013 to just $682bn by November 2025, while simultaneously expanding yuan-based trade across Asia.
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This shift was triggered by what Arauz describes as “eroding trust” in US financial systems.
“Perhaps the most serious element that has accelerated this diversification has been the weaponisation of the hegemonic banking system,” Arauz said. “[Through] sanctions, through asset freezes, through confiscation of international reserves in many countries … [these] have definitely stirred things up and made countries reflect about the reliance on this previously thought of neutral system that is now, on the other hand a threat, to their national sovereignty and economic policies.”
The climate crisis is also acting as a catalyst. As the world transitions away from fossil fuels, structural strain is placed on the demand for dollars, and the more the US clings to fossil fuel dependency in order to maintain monetary dominance, the deeper the cracks become.
Gulf states have long-term plans to diversify away from oil and reinvest a substantial portion of their oil revenues in green value chains, challenging the core pact which upholds the petrodollar system that US currency dominance has long depended on.
And while economists expect the dollar to remain the primary reserve currency in the near term, it has also been noted that once transitions to a new system are underway, they can happen very quickly. Speaking at the World Economic Forum in Davos in January, Jeffry Frieden, political science professor at Columbia University, warned of “an erosion of confidence in the dollar” amid mounting doubts about the safety of US Treasuries as “the most important financial asset in the world”.
‘US pulling itself out of the picture’
The Trump administration’s response to a shift away from the dollar has been to double down on arms sales and fossil fuel infrastructure – what Kaboub calls a “long-term strategic failure” that fundamentally misreads the changing dynamics of global power.
Trump’s recent $142bn arms deal with Saudi Arabia aims to tether Gulf revenues to the dollar through military exports. However, economists like Maya Senussi at Oxford Economics and John Sfakianakis of the Gulf Research Centre warn that financing such deals alongside decarbonisation projects will strain GCC budgets, and Bloomberg estimates it will require oil prices to be at least $96 a barrel just to break even. Brent oil prices currently hover around $67-68.
And in the Global South, higher oil prices may inadvertently threaten dollar dominance by exacerbating debt burdens by increasing repayment costs, pushing countries towards cheaper (and greener) energy systems. America’s transition to net fossil fuel exporter status means higher oil prices now strengthen rather than weaken the dollar, creating a triple blow for dollar-indebted countries in Latin America and Africa: higher energy costs, escalating debt servicing and constrained fiscal space.
The very mechanism designed to strengthen dollar ties – expensive arms deals premised on elevated oil prices – accelerates the search for alternatives among countries holding critical transition minerals like lithium, copper and cobalt. This pushes the US further from the green value chains of the future.
“The US is pulling itself out of the picture, it’s divesting from the green technologies and green industries. Which means it’s moving away from its interest in critical minerals,” says Kaboub. “So the remaining big player is China, and it’s a friend of the Global South.”
Today, China controls 85-90% of global rare earth processing and offers renewable energy equipment that remains attractive to the GCC despite US and EU tariffs. This is thanks to competitive pricing and comprehensive infrastructure approaches that western competitors have largely failed to match.
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Kaboub says that Trump’s minerals-for-security deals, such as in Greenland and elsewhere, may secure short-term market access but erode global trust in US foreign policy, a cornerstone of confidence in the dollar. “The isolated backwards technology bloc is going to be the United States,” he says.
As Lagarde observed, investors increasingly seek “geopolitical assurance in another form” by directing investments toward regions perceived as “dependable security allies” – but this no longer automatically defaults to the US as its government criticises its one-time allies and jeopardises the future of NATO.
Yet the petrodollar system faces challenges that extend far beyond the geopolitics of sanctions; climate change has introduced structural pressures making the core foundations of dollar dominance increasingly untenable.
However, given Trump’s bellicose stance on Venezuela and Greenland, there is a risk that American policymakers will not recognise this new reality until it is too late.
This article was originally published by Green Central Banking.
The post Explainer: What is the petrodollar and why is it under pressure? appeared first on Climate Home News.
Explainer: What is the petrodollar and why is it under pressure?
The right-wing populist Hungarian government led by Viktor Orbán has suffered a landslide electoral defeat to the centre-right Tisza party, led by Péter Magyar.
This brings to an end 16 years of rule by Orbán and his Fidesz party, a move welcomed by many around the world who were concerned about Hungary’s “slide toward authoritarianism”.
Hungary has played a disproportionate role in EU climate and energy policy in recent years, by repeatedly vetoing climate action and by delaying the phaseout of Russian fossil-fuel imports.
Magyar did not prioritise climate and energy issues in his electoral campaign, but he has championed cooperation with the EU and proposed a 2035 deadline for “eliminating Russian energy dependence”.
Hungarian experts tell Carbon Brief that, while the new government is yet to be formed, it is likely that Magyar will move quickly to secure EU funds for “green” measures.
One expert notes that “this is not a progressive pivot”, with Hungary unlikely to emerge as a climate leader in the EU, even if it is less disruptive to the bloc’s wider climate strategy.
- What was Orbán’s approach to climate action?
- What will be the new Hungarian government’s climate and energy policies?
- How will the new government approach EU climate policy?
- What has the new leadership said about Russian fossil fuels?
What was Orbán’s approach to climate action?
Hungary has had a mixed record on climate change under then prime minister Orbán, supporting some relevant actions while opposing others – particularly those taken at an EU level. This broadly reflects his Fidesz party’s populist and Eurosceptic leanings.
Orbán has described the EU’s climate goals as a “utopian fantasy” that would “destroy the middle class”. He has also accused “western elites” of wanting people to “live in fear” of climate change.
Yet, despite being embraced by climate sceptics elsewhere and supporting climate-sceptic lobbyists, Orbán’s government has not overtly adopted such sceptical rhetoric.
In fact, reflecting broad Hungarian support for climate action, Orbán has framed his nation as a “climate champion” – albeit one taking a “pragmatic” approach. This was captured in his speech at the COP29 summit in 2024, when he said:
“We must continue advancing the green transition, while also maintaining our use of natural gas, oil and nuclear energy…Our climate policy should be guided by careful consideration and common sense, not by ideology, alarmism or panic.”
Domestically, Orbán’s government has pursued various climate goals, including a 2050 net-zero target, phasing out coal power by 2029 and supporting the expansion of solar power.
What will be the new Hungarian government’s climate and energy policies?
Climate change was not a major issue in the April election and Magyar, the incoming prime minister, hardly mentioned it in his campaign.
However, the 243-page manifesto released by his Tisza party includes many climate-related proposals, such as home insulation, railway electrification and tackling drought.
The document says some of these measures – notably “energy modernisation and efficiency programmes” – will be funded with billions of euros in EU funds that have been frozen under Orbán. (See: How will the new government approach EU climate policy?)
One notable pledge is to “double the share of renewable energy in domestic energy supply” by 2040. As the chart below shows, Hungary already generates three-quarters of its electricity from clean sources – predominantly Paks, its single nuclear power plant.
Nearly a third of Hungary’s electricity comes from solar, which has benefited from supportive government schemes in recent years. In contrast, for years, the Orbán government blocked the construction of wind turbines, meaning there is virtually no wind power in Hungary.
The Tisza manifesto recognises this imbalance, stating that “we will abolish the unnecessary restrictions preventing the installation of new wind turbines”, while also supporting geothermal energy.
Energy prices are a key political issue in Hungary, as they are in many nations around the world. Orbán’s “utility cost reduction” has been a flagship policy for many years, capping household prices using large state subsidies.
During the election, Orbán accused his opponent of planning to get rid of the energy price cap. In fact, the Tizsa manifesto says the new government will “maintain and expand” the scheme and add new VAT cuts on firewood.
Despite having few batteries and electric vehicles (EVs) domestically, Hungary has emerged in recent years as a major battery manufacturer, driven by Chinese and South Korean investment. However, this boom has sparked environmental and social concerns.
Zsolt Lengyel, founder and chair of the Institute for European Energy and Climate Policy (IEECP), tells Carbon Brief:
“Orbán’s battery and EV strategy – in theory, a flagship of the transition – has backfired politically…So Tisza inherits a paradox: it needs to accelerate the transition, but does so in an environment where parts of that transition have already lost public legitimacy.”
With much still unknown about Magyar’s attitude to climate and energy policy, some Hungarian experts that Carbon Brief spoke to cautioned against “speculation” and “wishful thinking” when assessing his climate credentials.
How will the new government approach EU climate policy?
There is cautious optimism among EU officials and leaders that a Hungarian government led by Magyar will be more cooperative on EU-led initiatives.
Under Orbán, Hungary has been a vocal and persistent opponent of EU climate policies.
Since 2011, 21 of all the 48 vetoes on joint EU actions have been used by Hungary. These include blocking efforts to sanction Russia following the country’s invasion of Ukraine. (See: What has the new leadership said about Russian fossil fuels?)
Among other issues, Hungary has vetoed or obstructed progress on the EU’s 2050 net-zero target, the “fit for 55” legislative package to help meet that goal and the 2035 ban on petrol and diesel cars.
Generally, this opposition did not totally block these policies, as most did not require unanimous agreement among EU member states. However, it did tend to slow down or complicate the process. Hungary was also not acting alone – it was often joined by fellow eastern and central European states, claiming the policies would have high costs.
Nevertheless, the Orbán government’s aversion to the EU has taken it further than other states. In recent months, for example, Hungary has launched a legal case against the EU over its phaseout plan for Russian oil and gas imports.
In this context, Lengyel tells Carbon Brief:
“Orbán’s exit removes Hungary’s most damaging feature in EU climate politics: the ideological reflex to oppose ‘anything Brussels does’.”
However, just because Magyar is less hostile to the EU does not mean his government will be a climate leader.
Magyar’s centre-right Tisza party is aligned with the European People’s Party (EPP) grouping in the European parliament, which has been instrumental in weakening EU climate goals in recent months. Given this, Lengyel tells Carbon Brief.
“Let’s be clear: this is not a progressive pivot. Tisza sits close to the EPP mainstream and is unlikely to challenge it. If anything, it will follow it, including on any watering down of green-deal elements.”
Crucially, Hungary is entitled to billions of euros of EU funds that have been blocked due to breaches of conditions regarding the rule of law and human rights under Orbán.
These include €9.5bn for Hungary’s recovery and resilience plan, the EU’s post-Covid recovery fund, much of which is earmarked for the “green transition”.
This finance needs to be disbursed before the end of August – and both Magyar and the EU have been clear that unlocking the funds is a priority.
Jozsef Feiler, director of the south-east Europe and Hungary programme at the European Climate Foundation, which funds Carbon Brief, says “full EU compliance” will be crucial for Hungary over the coming months, in order to obtain these funds. He tells Carbon Brief:
“The economic and financial stability of the new government [will depend] on obtaining the recovery and resilience facility funds and managing some kind of absorption before the 26 August hard deadline.”
Another early challenge will be the new government’s approach to the new part of the EU’s emissions trading scheme (ETS) – known as ETS2 – which will put a price on emissions from buildings, cars and other sources not covered in the original ETS.
ETS2 is already facing criticism from member states concerned about rising fuel costs. Moreover, Hungary is likely to be one of the countries that is most exposed to high fossil-fuel prices.
István Bart, a senior director in carbon pricing at the Environmental Defence Fund, tells Carbon Brief that Orbán’s government has done little to help with the implementation of ETS2, which is currently due to start in 2028. He notes that, with the question of affordability so fraught in Hungary, it is unclear how Magyar will tackle this issue.
What has the new leadership said about Russian fossil fuels?
One of the most notable policy statements made in Tisza’s manifesto is a commitment that:
“By 2035, we will eliminate Russian energy dependence and diversify our domestic energy supply.”
Despite its relatively clean electricity supply, Hungary is still heavily reliant on fossil fuels – including in its transport, heating and industrial sectors – the majority of which are imported.
Russia is Hungary’s main fossil-fuel trading partner, with the Druzhba and TurkStream pipelines supplying much of the smaller nation’s needs for oil and gas, respectively.
Among EU member states, Hungary is second only to Slovakia in terms of reliance on Russian fossil fuels. In 2024, 74% of Hungary’s gas and 48% of its oil were imported from Russia, as shown in the chart below.
Since Russia’s full-scale invasion of Ukraine in 2022, most EU nations have taken steps to reduce their dependence on Russian fossil fuels.
The EU has implemented a series of sanctions on Russia and the European Commission launched the REPowerEU plan to “fully end dependency on Russian energy”.
Under Orbán, however, Hungary has obstructed efforts to wean the EU off Russian fossil fuels, citing energy-security concerns. It has successfully negotiated exemptions from Russian oil sanctions, allowing the country to increase its reliance on cheap Russian crude.
The REPowerEU regulation involves a ban on Russian pipeline gas by September 2027. Unlike sanctions, the EU did not need unanimity among states to pass this.
It is notable that Tisza has only committed to end reliance on Russian energy by 2035 – eight years after the EU deadline. It is unclear how Magyar’s new government will negotiate this discrepancy, especially given long-term contracts with Russian suppliers.
Hungary also relies on Russia for nuclear technology and supplies of uranium for its nuclear plant. In its manifesto, Tisza says it will explore the possibility of sourcing nuclear fuel from US or French suppliers, as well as building small modular reactors.
Orbán had already started pursuing diversified nuclear and fossil-fuel supplies by buying from the US, even as it secured exemptions from US sanctions on Russian energy imports. It is possible that Tisza may maintain this approach.
However, with the Iran war and energy crisis looming in recent months, Bart, from EDF, tells Carbon Brief:
“Before the Iran war started, you could have said: ‘Why don’t you just buy LNG [liquified natural gas]?’…Now it seems like less of an option, so, unfortunately, in the short term, [Russian gas] has to stay because we don’t really have an alternative.”
The post Q&A: What Magyar’s defeat of Orbán in Hungary means for climate and energy appeared first on Carbon Brief.
Q&A: What Magyar’s defeat of Orbán in Hungary means for climate and energy
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