After the first week of the US-Israeli war against Iran, I have been looking back to my career in finance for hints about how the situation will play out. My own experience is relevant, because I completed my PhD just after the second of the 1970s oil crises ( 1979-1982 ), and my primary focus was on the Organization of Petroleum Exporting Nations, or Opec, its monumental surpluses and the question of how it might re-invest them. ( I also shared an office with an Iranian scholar who had recently fled his country, following the Islamic Revolution. )

My PhD thesis required me to apply a relatively sophisticated ( at the time ) asset allocation model, according to which “low absorbers” like the Gulf Cooperation Council ( GCC ) countries could choose to optimize the future value of oil currently in the ground, its value today or their investment portfolios – which included overseas holdings. They were called low absorbers because they didn’t need all the current revenues from oil production, as opposed to a high absorber like Nigeria, which had fewer reinvestment options.

These were the early days of the region’s sovereign wealth funds, with many Gulf producers becoming highly active investors in global markets for the first time. But now that their outsize presence is the norm, one must consider what would happen if Gulf states were suddenly to withdraw or sell their foreign assets. Doing so might not make much fiscal sense, given how sharply oil prices have risen. But it could make political sense if GCC policymakers want to pressure the US into finding an offramp and ending the war.

After all, another lesson from my past experience with Middle East crises is that oil-price movements one month after an initial shock often bear little resemblance to the original price response. I used to collect published research and news clippings in which experts would claim confidently that crude oil prices were heading above US$100 per barrel, where they would remain. In fact, they always fell back down soon enough, and would continue trending down for the next 20 years.

Given how difficult it is to forecast energy prices, one should always be sceptical of anyone who is too confident about their own prognostications. In hindsight, it appears that the long-term elasticity of energy supply in the face of price changes has been greater than many believed. Both the supply and demand response tend to be larger than expected. In the current context, countries that have already begun to adopt renewables or alternative energy sources will be relatively better off, and those that have not may finally start to advance down this path. Oil and natural gas producers, therefore, cannot assume that prices will stay high indefinitely.

Three final lessons concern politics and geopolitics. For starters, my earlier work on Middle East issues leaves me sceptical that the Islamic Republic will soon fall to a peaceful internal revolution – even though a more tolerant regime and political system would obviously benefit Iran’s 90 million people, not to mention the rest of the region.

Second, we must not ignore the elephant in the room. Recall that, during the 1997-98 Asian financial crisis, it was China that helped to restore order by persuading US Treasury secretary Robert Rubin to intervene to stop a further destabilizing rise in the dollar. I suspect that something similar could happen this time, considering that President Donald Trump still plans to meet with his Chinese counterpart, Xi Jinping, just weeks from now. As a major buyer of Gulf oil, China has every reason to try to bring the conflict to an end, and it can exercise influence through many channels, including the Brics+ ( Brazil, Russia, India, China, South Africa and five newer members, including Iran ).

The last lesson comes from the period immediately following the September 11 2001, attacks on the US, which led me to coin the Bric acronym in the first place. Given today’s changing global trade patterns and diplomatic relationships, I would not be surprised to see GCC countries moving closer to China, India, and other rising powers, implying that they will subtly start to distance themselves from the West. If this war has shown anything so far, it is that allying yourself with the US no longer guarantees security. The economic opportunities offered by rising Asia are growing more attractive by the day.

Jim O’Neill is a former UK Treasury minister and a former chairman of Goldman Sachs Asset Management.

Copyright: Project Syndicate