The ongoing conflict in Iran and the effective closure of the Strait of Hormuz — a key waterway for global oil shipments — have pushed oil prices sharply higher. Both major oil benchmarks have jumped from around $70 per barrel to around $100 in just a few days. This has created significant uncertainty in financial markets, with concerns about the rising costs of energy causing another rise in inflation. This could delay further rate cuts by the Federal Reserve. Recall in 2022 when inflation spiked, the Federal Reserve raised interest rates to try to slow down the economy and allow prices to cool. Think of interest rates as a brake pedal on the economy the Federal Reserve can press. As inflation has fallen over the past 3 years, the Federal Reserve has been able to begin reducing interest rates, effectively letting off the economic brakes. One of the fears currently causing some volatility in the stock market is that the spike in oil prices could lead to a rise in inflation which could force the Fed to stop reducing interest rates.
But for investors, history shows that staying focused on the long term is the best approach during times like these. Oil price shocks have occurred every decade or so, and while each situation is different, there is a clear pattern: prices surge, markets become volatile, and then things eventually calm down and recover.
Why oil has climbed to $100
The Strait of Hormuz is a narrow waterway connecting the Persian Gulf to the rest of the world. About 20% of global oil shipments pass through it each year. Attacks on tankers and safety concerns have effectively halted traffic, forcing major oil-producing countries like Saudi Arabia, Iraq, and the UAE to store oil instead of shipping it. As storage fills up, these countries have had to cut production, which is why prices have risen so quickly.
It helps to put this in perspective. When Russia invaded Ukraine in early 2022, oil rose to nearly $128 per barrel and U.S. gasoline prices topped $5 per gallon. Before that, oil hit record highs in the mid-2000s. In each case, prices eventually came back down as supply and demand adjusted.
How higher oil prices affect consumers and businesses
The most direct impact for everyday consumers is at the gas pump. Gasoline prices have risen to around $3.50 per gallon nationally, and could go higher. That said, this is still well below the $5 per gallon seen four years ago. Beyond gasoline, higher energy costs also raise the price of transporting and manufacturing goods, which can push up prices across the economy.
Economists call this "cost-push inflation" — when rising production costs get passed on to consumers. This is different from inflation caused by people spending more. Importantly, supply-driven price increases like this tend to be temporary, meaning their effects fade over time as the situation stabilizes or the economy adapts. The U.S. is also better positioned than in past oil crises, as it is now the world’s largest oil and natural gas producer.
Markets can weather higher oil prices
Financial markets have reacted to the news, but it’s important to keep things in context. While some international indexes have fallen sharply recently, they are still significantly higher than they were a year ago. But this also shows us that international economies are less well positioned to weather an oil price spike as many of them are significant oil importers.The U.S. stock market is only a couple of percent off of it's highs due in part to the fact that the U.S. is more insulated as we are able to produce most of our own oil right here at home and are less impacted by what's happening in the Middle East.
Additionally, the conflict in the Middle East has yet to have any impact on the expected earnings growth for the domestic companies in which we invest. Earnings momentum is strong and is likely to remain so despite the war in Iran as the drivers of economic growth in the US remain in place and the US enjoys energy independence. Double digit earnings growth is likely in 2026, creating a solid foundation for the stock market until the geopolitical impacts ease.
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.