The ongoing conflict involving Iran and the effective shutdown of the Strait of Hormuz have caused oil prices to rise sharply. Both major oil benchmarks — Brent crude and WTI (two key measures of global oil prices) — have jumped from roughly $70 per barrel to around $100 in just a matter of days. This brings prices close to levels last seen in 2022, when Russia invaded Ukraine. These developments have created significant uncertainty in global markets, with news outlets warning of a “global economic downturn,” “stagflation” (a combination of slow growth and rising prices), and similar concerns.
The safety of civilians and military personnel remains the most critical concern in this conflict. For investors, however, history shows that keeping a long-term perspective is the best approach when facing major uncertainty. A quote often attributed to Winston Churchill is “the farther back you can look, the farther forward you are likely to see.” This wisdom applies well to energy price shocks, which have occurred roughly every decade. While every situation is different, there is a recognizable pattern: oil prices surge in response to geopolitical conflict, markets become volatile, and then things eventually calm down and recover.
The situation is still developing, and there are no guarantees about when stability will return to the region or to financial markets. Recent events — including other Middle East conflicts, rising inflation, trade disputes, and instability in Venezuela earlier this year — all provide useful context. So, what should investors keep in mind over the coming weeks?
Why oil has climbed to $100
For investors, energy prices are the main way that global conflicts affect the broader economy and financial markets. The impact of each conflict depends on how it changes the supply of and demand for oil. Right now, higher oil prices are being driven by disruptions to how oil is transported and stored, as well as production cuts by major oil-producing countries in the Middle East. How long the conflict lasts is also a factor, especially as Iran selects a new supreme leader.
At the center of the current oil price jump is the Strait of Hormuz — a narrow waterway that connects the Persian Gulf to the rest of the world. About 20% of all global oil shipments, along with a large share of natural gas, pass through this critical passage every year. While Iran cannot technically close the strait entirely, attacks on oil tankers and safety concerns have been enough to halt traffic. Major shipping companies have restricted or stopped bookings through the area, and hundreds of oil tankers are currently stuck inside the strait.
This creates a chain reaction in the energy market. Without the ability to ship oil through the Strait of Hormuz, large Middle Eastern oil producers have been forced to store their oil instead. As storage facilities fill up, countries including Saudi Arabia, Iraq, Kuwait, Qatar, and the UAE have had to reduce production. Unlike typical planned production cuts designed to push prices higher, these reductions are being forced by circumstances. This sequence of events explains why oil prices have risen so quickly in such a short time.
It is widely believed that when oil prices rise above $100 per barrel, it begins to strain the economy by squeezing household budgets and pushing inflation higher. Still, it helps to put these moves in context. While oil prices have been relatively low in recent years, they have gone through major swings throughout history. When Russia invaded Ukraine in early 2022, Brent crude surged to nearly $128 per barrel, pushing average gasoline prices in the U.S. above $5 per gallon. Before that, the mid-2000s saw oil reach record highs driven by strong global economic growth, ahead of the 2008 financial crisis. In each case, prices eventually settled as supply and demand found a new balance.
How higher oil prices affect consumers and businesses
The U.S. is better positioned today than it was during past oil crises, largely because of the shale revolution — a major expansion in domestic oil and gas production using new drilling techniques. As the world’s largest producer of both oil and natural gas, the U.S. enjoys a level of energy independence that did not exist during earlier oil shocks. Although oil is priced globally and the U.S. still imports some types of crude oil, this independence helps shield the domestic economy more than countries in Asia or Europe. In fact, the U.S. is considered a “swing producer,” meaning it has the ability to increase production when oil prices are high.
Even so, higher oil prices affect nearly every part of the economy. For everyday consumers, the most noticeable impact is at the gas pump, as higher fuel costs directly reduce the money available for other spending. Currently, gasoline prices have risen back toward $3.50 per gallon nationwide and could go higher. While this is a notable increase, it is still well below the $5 per gallon seen four years ago.
Beyond the gas pump, there are many other indirect effects on everyday prices. When energy costs rise, so does the cost of shipping goods, making products, and running businesses. In this way, higher oil prices act like a broad increase in costs across the economy — raising the price of goods and services and leaving consumers with less money to spend.
Economists sometimes call this “cost-push inflation” — when rising production costs, like higher energy prices, get passed along to consumers in the form of higher prices. This is different from “demand-pull inflation,” where prices rise because people are spending more money, such as when government stimulus checks are distributed.
This distinction is important because supply shocks — sudden disruptions to the availability of a resource — are often seen by economists and investors as “transitory,” meaning their effects are temporary. Over time, the situation may stabilize and oil prices may fall, or the economy may simply adapt to higher energy costs. While sudden jumps in energy prices are difficult, history suggests they do not cause permanent damage to the economy.
Markets can weather higher oil prices
Despite these historical lessons, it is true that financial markets can react strongly to oil price shocks in the short term. The S&P 500 — a broad measure of large U.S. company stocks — is only down a couple of percentage points so far this year. However, many headlines are drawing attention to steeper declines elsewhere, such as South Korea’s KOSPI index falling 17% and Japan’s Nikkei index dropping 10% since the end of February. What those headlines often leave out is that the KOSPI and Nikkei are still up over 104% and 40%, respectively, over the past year, even after these recent drops. Markets never move in a straight line, which is why maintaining this broader perspective is so important.
At the same time, energy companies tend to benefit when oil prices are high. The energy sector has gained about 25% so far this year and is leading the overall market, just as it did in 2021 and 2022. Similarly, commodities — physical goods like oil, gas, and metals — have risen over 20% this year, driven by both energy and precious metals. This is not a suggestion to focus only on energy investments, but rather a reminder of the value of holding a variety of different types of investments across different sectors.
Recent events also create uncertainty about what the Federal Reserve (the U.S. central bank, often called “the Fed”) may do next. If inflation rises because of higher oil prices, the Fed may need to keep interest rates higher than currently expected. Right now, market expectations point to at least one interest rate cut this year in September, and possibly two by year-end. However, if the supply disruption turns out to be temporary — even if it lasts several months — its effect on interest rate policy may be limited, as history has shown.
Of course, this does not mean that markets will stop experiencing day-to-day swings. Rather, it is a reminder that a well-constructed mix of investments and a solid financial plan are specifically designed to handle these kinds of risks. Making big changes to a portfolio in reaction to alarming headlines is often counterproductive. Long-term investment success is more commonly achieved by staying diversified — spreading investments across different types of assets — and keeping focus on long-term financial goals.
The bottom line? While the conflict in Iran has pushed oil prices above $100 and created volatility, financial markets and the economy have historically adapted to supply shocks. Investors should maintain perspective, stay diversified, and continue to focus on their long-term financial goals rather than reacting to daily geopolitical headlines.
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