The closure of a strategic waterway by a besieged nation ranks among the rarest and most consequential events in the history of the global economy. It has happened only twice in the postwar era. In 1956, Egypt closed the Suez Canal for five months – an act that broke Britain’s imperial currency and inaugurated the petrodollar age. It demonstrated for the first time that a small country could inflict serious damage on the economic order that had subjugated it. Now Iran has effectively blockaded the Strait of Hormuz, through which a quarter of the world’s seaborne oil passes. The question is whether this crisis heralds the end of American hegemony – and marks the beginning of the struggle over who or what will replace it.

The US-Israeli war on Iran has stranded more than 3000 vessels in the Persian Gulf and left the world short of over eleven million barrels of oil a day. Entire hydrocarbon-based supply chains have been disrupted: not just oil and gas exports but also supplies of urea used in fertiliser, helium for semiconductors and sulphur for defence equipment. Having long suffered under Western sanctions, Iran is now deploying the economic weapon itself.

The effects are ruinous and cascading. In the northern hemisphere, fertiliser is running out just as farmers prepare to sow the spring crop. So too in famine-struck Sudan. Egypt and Sri Lanka have initiated work-from-home policies in a bid to ration oil use. In Cairo, shops and restaurants have been ordered to close at 9pm. Currencies across Asia – from the won to the rupee – are swooning from capital outflows. Turkey has spent billions of dollars to stabilise the lira.

The shockwaves extend beyond cash-strapped nations. In the UK, a large energy importer, sovereign bond yields (which affect the government’s costs of borrowing) have risen to levels not seen since the 2008 financial crisis. The US, which is the world’s largest oil and gas exporter, may be more insulated, but inflation is still forecast to top 4% within the year. Investors have dumped US Treasuries at a speed and volume that has forced some Wall Street banks to abandon their screens and revert to old-fashioned human-to-human trading. China, which sits on vast energy reserves, is an exception to the general chaos. Its bond yields have remained calm.

The Hormuz crisis is as much a financial stress test as it is a geopolitical reckoning. It might spell the end of the US dollar’s reign as both the world’s reserve currency and its universal measure of value – a status that has underpinned American hegemony for seven decades. In this period, the dollar has denominated the international price of crude oil (whose trade exceeded $1 trillion in 2024) and most of global debt, valued at more than $100 trillion outstanding. In recent years, rising energy prices have tended to strengthen the dollar, transferring wealth to the US and away from countries least able to bear the loss.

Hormuz does not yet signal the end of this hydrocarbon dollar complex, which has always been a combustible mix of power and volatility. But it does reveal the structural changes that would be needed for a hegemonic transition. Iran has permitted passage for ships from “non-hostile” states – at a transit fee of up to $2 million, preferably in yuan. Were the world to switch from the hydrocarbon dollar to the petroyuan, it would echo another aspect of the Suez Crisis, which brought an end to sterling’s reign as the world’s reserve currency. Unlike in 1956, however, the nations of the Global South now have considerable political leverage to shape the emerging world economic order.

American hegemony had already been eroding for years before the Hormuz crisis. The drivers for this are manifold: growing disgruntlement with dollar dominance, China’s rise as a systemic rival, the push to reduce fossil fuel dependence, and increased geopolitical assertiveness in the Global South.

A key turning point came four years ago, when Russia invaded Ukraine. In response, the US assembled a large bloc of nations to impose sanctions on Moscow. Putin retaliated by withholding energy from Europe, where gas prices spiralled out of control. In desperation, European leaders ramped up clean energy investment while also turning to alternative fossil fuel sources, including American liquefied natural gas. By 2023, close to half of the continent’s gas imports came from the US, whose oil and gas industry booked record profits. As energy bills rose, the Federal Reserve repeatedly raised interest rates to contain inflation, only adding to American bank revenues. An appreciating dollar and steeper debt payments combined to produce the largest annual decline in global foreign currency reserves in over two decades.

The 2022 energy crisis demonstrated the extraordinary coercive power of the imperial dollar: the US was able to cut Russia off from the global financial system almost overnight. Its lessons were not lost on the Global South: if this could happen to Russia, it could happen to anyone. The search for alternatives to dollar dependence – long discussed at BRICS summits and in chancelleries – intensified. China’s Cross-Border Interbank Payment System expanded. Bilateral trade agreements denominated in local currencies multiplied. The BRICS bloc, enlarged in 2024 to include Egypt, Ethiopia, Saudi Arabia, the UAE, and Iran, began discussing a common infrastructure settlement, autonomous from dollar-centred systems such as SWIFT. None of these initiatives amounted to a dollar replacement tout court. Some countries replenished their dollar reserves while others diversified into gold, and still others did both. But together they formed the outline of an alternative financial architecture.

Russia’s invasion inadvertently entrenched American dominance over global energy markets. (Even before the war in Ukraine, the US produced a fifth of the world’s oil and gas – more than any other country.) Washington has wielded that power in an increasingly arbitrary manner, blurring the line between market maneuvers and economic coercion. For instance, US LNG contracts, unlike their Qatari equivalent, have a “destination flexibility” clause that allows for the product to be diverted to more profitable markets in Europe. Among other things, this led to severe shortages in Asia. 

It was against this backdrop that the political foundations of American hegemony began to crack. Threats to abandon NATO, attacks on allies like Canada and Denmark, and arbitrary tariff wars: these have shattered the pretense that America – and its hydrocarbon dollar – could be a stabilising force. If hegemony requires consent from those it organises, Trump has replaced it with something closer to pure extraction: ‘Pay up or pay the price.’

What might the beginnings of hegemonic transition look like? The Suez Crisis offers one historical model. In the middle of the twentieth century, the UK was Europe’s largest energy provider. Ships ferrying the product from majority-British-controlled oilfields in the Persian Gulf sailed through the Suez Canal to reach the continent. “Sterling oil” was crucial to stabilising Britain’s precarious postwar finances, which were burdened by vast debts to the US. British troops had long been stationed in the Canal Zone, where the Anglo-French Suez Canal Company extracted transit fees and tolls. In 1954, Gamal Abdel Nasser had obtained an agreement for their withdrawal within two years.

Shortly after the last British troops had exited in 1956, upon discovering that Nasser was buying arms from the Soviets, the US and UK abruptly reneged on their promises to finance the Aswan High Dam. In retaliation, Nasser nationalised the Suez Canal Company. The takeover did not immediately halt Canal traffic, but it demonstrated Egypt’s ability to weaponise the waterway. To forcibly secure the passage of “sterling oil”, Britain, France and Israel invaded Egypt. Tel Aviv had its own reasons for joining the adventure: Egypt, with Saudi cooperation, had barred Israeli-bound oil tankers from the Canal ever since the Nakba.

Nasser’s response was simple but effective: he sank concrete-laden ships to block the Canal. The closure, which lasted from October 1956 to March 1957, led to severe oil shortages in Britain. Petrol was rationed, and heating oil supplies were cut. Harold Macmillan slashed defence spending and exhausted the UK’s dollar reserves in a desperate attempt to protect the pound. All the same, by 1957, Britain required an IMF bailout.

The turmoil set currency speculators on the sterling, launching wave after wave of selloffs. As the standoff dragged on, the Eisenhower administration began to fear that the Middle Eastern oil states would turn against the West – and towards the Soviet Union. The US declined to provide the UK with dollars and oil to fund the Suez campaign, which had the desired effect: Britain capitulated and withdrew its troops. Persuading Israel took longer. Eisenhower had to raise the prospect of sanctions before Tel Aviv left the Sinai Peninsula and the Gaza Strip.

The Suez Crisis sent reverberations through far-flung corners of the world economy. It boosted US balance sheets, eroded Britain’s standing in the global hierarchy, and condemned sterling to a future of chronic instability. The City of London was forced to remake itself into a consigliere for dollar markets. Still, sterling continued to finance a third of world trade. It took a few more decades – involving the collapse of Bretton Woods, the OPEC standoff of the 1970s, the Volcker shock, and the global debt crisis of the 1980s – before the dollar system was consolidated.

In retrospect, then, Suez did not quite mark the end of an era. Rather, it was the moment when the transition from sterling to dollar hegemony first became visible. Much the same is true of Hormuz. The question is: what is the next order going to look like?

For the nations of the Global South, it has been taking shape over the last few years, in the advancing buildout of clean energy – solar panels, wind farms, electric vehicles, battery plants and green hydrogen projects – which has become the potential exit from the hydrocarbon-dollar trap.

Given the dramatic decline in the costs of installing clean energy, this is clearly the rational choice. In 2022, faced with acute dollar shortages and battered by massive floods, Pakistan underwent a consumer-led revolution in solar, which now comprises a fifth of the country’s electricity supply. Nor is this shift limited to poorer countries. Russia’s invasion also pushed the EU to invest in clean energy, which now comprises 92% of its overall energy investment. China’s clean energy share is almost 70%. Globally, two-thirds of the $3.3 trillion in new energy investment flows into clean technology. The current spike in oil prices has already boosted demand for low-cost electric vehicles in China and Vietnam.

Crucially, the transition to clean energy also allows for greater sovereignty. A solar panel can be installed on a rooftop in Lahore without dollar transactions. An entrepreneur can set up a wind farm in Morocco without exposing themselves to American sanctions. By contrast, oil and LNG must be imported, priced in dollars, and paid for with reserves whose value can be diminished by the next US-inflicted shock.

To be sure, the green transition remains deeply uneven – constrained, for many countries, by access to capital and technology – and it is creating new dependencies of its own. China is the emerging power centre. Since 2022, its foreign investment in clean technology has surged and now stretches across 50 countries; the scale and ambition make comparisons to the Marshall Plan seem anachronistic. A majority of this green manufacturing occurs in Southeast Asia; it is also rapidly growing in the Middle East and North Africa. All these regions increasingly rely on Chinese financing and technical know-how.

Nor will the dollar’s prominence fade quickly. On the contrary, the dollar system gained power in the late twentieth and early twenty-first century as the world economy lurched from one crisis to the next, prompting larger American structural interventions. During the 2008 financial crash, for instance, the Federal Reserve formally established a “swapline” network, giving close allies – such as the EU and Japan – access to emergency dollar liquidity, which they have since heavily relied upon.

This financial backstop is a lifeline: the Fed can simply print dollars and make liquidity problems go away. It is also a leash. Trump’s behaviour towards allies has grown increasingly erratic: he is presently berating NATO partners for not joining his “excursion” to the Strait of Hormuz. If the energy crisis deepens, he may press the Treasury and Fed to weaponise US financial support. Indeed, a Fed bailout can no longer be taken for granted. Countries that refuse to kowtow risk losing the backstop entirely.

The bulk of the oil that flows through the Strait of Hormuz ends up in Asia. The economic turbulence unleashed by the US-Israeli assault has reached wealthy fossil-fuel importers like Japan and South Korea, who have spent billions shoring up their currencies. In the event of a financial meltdown, they can at least reach for dollar swaplines – an option unavailable to the continent’s poorer importers, like Bangladesh and the Philippines.

Pakistan offers them a different model. The country’s solar base has made it more energy resilient, and given it more geopolitical leverage, than most observers expected. Islamabad has secured safe passage for its oil shipments through the Strait.

Energy crises tend to have sharply negative and long-lasting consequences. That is perhaps why the International Energy Agency, a consortium of thirty-two countries, has announced the release of 400 million barrels of oil onto the global market – an extraordinary multilateral effort. Even the US – in every way a rogue state – is taking ameliorative measures. Scott Bessent, the treasury secretary, has temporarily lifted sanctions on stranded Russian seaborne oil as well as on Iranian oil, explicitly permitting its entry into the US. If both moves signalled desperation, they also ominously point to a potential Venezuela-style takeover of Tehran’s oil sector.

So far, none of these interventions have worked. The price of Brent crude continues to hover around $110 dollars a barrel, up from roughly $60 before the war. Meanwhile, Iran, whose ships traverse the Strait freely, is earning almost double the oil revenues it did a year ago.

Hormuz has exposed both the fragility of the fossil fuel system and the limits of American power. Washington no longer seems able to win the wars it starts or manage the economic fallout of its recklessness. Yet it would be naïve to expect American power to collapse suddenly, leaving a clean space for something better. It is more likely to degrade slowly, while thwarting, through violence and economic coercion, the emergence of a new international order. Gaza, Lebanon, and Iran are reminders, if any were needed, of the enduring reach of the US war machine.

While much of world attention is on Iran, which the US is bombing “back to the stone age”, Washington is also running an oil blockade of its own. As the Cuban economy teeters on the brink of collapse, it is painful to remember that Havana was where the United Nations first mapped out an ambitious trade and employment framework for the postwar international order. The 1948 Havana Charter proposed mechanisms to stabilise commodity prices and restructure world trade to free the Global South from continued dependence on the old colonial powers. When the US refused to ratify the charter, it was abandoned.

Which nations will come together to design and commit to a new Havana Charter? The BRICS enlargement, expansion of regional payment systems, and clean energy surge do not themselves constitute such a coalition, but together they are its raw materials. What’s missing is a constitutive political act – the equivalent of a new Bretton Woods for the post-American order, one that does not depend on US ratification or even US involvement for its legitimacy.

Hormuz has made the end of American hegemony imaginable. It has also shown that, perhaps for the first time, the Global South possesses the political will and ideas needed to build a new international order.