Opinion

Insuring against dependency

For much of the US / Iran conflict, investors have understandably watched two things like hawks: equity markets and the oil price. Both offer an immediate reading of how worried markets are and, with the Strait of Hormuz still operating to the tune of a geo-political hokey cokey, whether a geopolitical crisis is becoming a very real global economic one.

Yet with all that said, perhaps the more interesting consequences will take much longer to appear.

The surprise of the oil shock has not simply been that prices rose, but that they did not rise further. China provides part of the explanation. Having spent years accumulating enormous strategic reserves of crude, investing in renewable energy and electrified transport and building an industrial economy capable of substituting one source of energy or raw material for another, Beijing entered the crisis with options.

When Gulf supplies were interrupted, China could reduce imports and draw upon inventories. It could restrict refined product exports, reduce domestic consumption and shift transport demand. Its manufacturers even demonstrated an ability to substitute coal for oil derived inputs in some petrochemical processes.

This underlines how much economic resilience is underwritten by geopolitical power. For decades the United States has enjoyed perhaps the greatest example of that power through the dollar. Its position as the world’s principal reserve currency helps create extraordinary international demand for dollar assets and gives America financial flexibility that other countries simply do not possess.

The Iran war is unlikely to change that suddenly but understanding the use of the dollar in this context might be the wrong question. The issue is not whether countries abandon the dollar tomorrow, but whether repeated geopolitical shocks encourage them – gradually – to build alternatives to systems dominated by America.

China’s response to the oil crisis does not depend upon finding an alternative supplier at the last minute. It has spent years reducing the economic leverage that an interruption can exert over it. Storage, renewable energy, electric vehicles, railways and alternative industrial processes collectively provide strategic optionality. Other countries may increasingly think about financial infrastructure in much the same way.

That introduces another way of calculating the cost of war to the United States. There is the obvious military expenditure, but  there are also second order costs. Higher oil prices can feed inflation, complicating the task of the Federal Reserve. Greater defence spending adds to already substantial fiscal demands. Disrupted trade reduces global growth and every demonstration of America’s willingness to use its military and financial power provides another incentive for rivals to reduce their exposure to both.

None of this means the dollar is about to lose its reserve status. The depth of US capital markets, liquidity of Treasury securities and absence of a credible alternative remain formidable advantages. It does, however, suggest a gradual movement towards a world in which countries value resilience as highly as efficiency.

That may be the investment lesson from this war. Investors have spent months asking where oil will trade next week and what another missile strike might do to equities tomorrow. Those questions matter, but the bigger changes may be taking place beneath them.

China has demonstrated that stockpiles, infrastructure and energy independence can alter the balance of a global commodity market. America has demonstrated again the reach of its military and financial power.

The question for the next decade is whether exercising that power ultimately strengthens the system on which it rests, or persuades more of the world to insure itself against it.

17th August 2026