As the conflict with Iran continues, the markets are getting shaken up a bit. Oil prices are surging over $100 a barrel. With ships under the threat of attack if they pass through the Strait of Hormuz, this conflict has dramatically slowed down oil shipments. In 2024 - 2025 an average of 20 million barrels of oil per day passed through the Strait, representing 20% of the World's petroleum liquids consumption. Interestingly 85% of this exported oil from the Middle East, goes to Asian markets, like China, India and Japan. So, you might ask yourself how do high oil prices affect my finances?
Simply put, higher oil prices mean higher gas and diesel prices, making shipping costs rise on all consumer goods that have to be transported. This leads to higher prices on things like clothing, groceries and household goods. Higher transportation costs will also affect the airlines. If the cost of jet fuel increases, so do those airline tickets.
Higher prices mean higher inflation, which the Federal Reserve watches closely. Typically, in response to higher prices and inflation running greater than the 2% annual target the Fed has, they may raise interest rates to slow down economic activity and curb demand, ultimately slowing inflation. However, higher interest rates could slow down other parts of the economy, making borrowing costs more expensive. Generally anything attributed to financing costs. Someone buying their first home, may not be able to afford the higher interest rate on the mortgage. With higher interest rates, you may put off that new car purchase or home improvement. Or companies may hold off on expanding and taking on any more debt at a time when rates are higher.
And then there is the direct impact to household budgets. If you are driving to work every day, but now the cost of fuel has increased by another $200 per month, you have less disposable income. Certain companies, especially those that cater to the lower income segment, may experience a weakness in sales, as the high price of gas eats away at their customer's paychecks.
So, now you can see, as the price of oil rises to levels we haven't seen in many years, there tends to be a domino effect throughout the global economy, slowing growth. If prices stay high for long, it may be the catalyst that leads to the next recession and that has a direct impact on your investments.