Oil, Conflict, and the Return of Inflation Risk

by | Mar 18, 2026 | Client Communication, Our Insights

The specter of inflation has reentered the public conversation. The Middle East conflict has rightfully refocused economists, central banks, and investment professionals on inflation prospects. After all, any severe supply constraints can ignite higher prices.

Let’s first put some facts on the table.

  • Prior to the current conflict, Iran produced about 4% of the world’s oil supply.1
  • Iran was the 9th largest oil producer.
  1.  
    1. The U.S. is the world’s largest producer with 22% of the world’s oil supply.1
  • About 91% of Iran’s oil is purchased by China.2
  • About 20% of the world’s oil supply travels through the Strait of Hormuz.1

Energy is foundational to everything we do, from turning the lights on to furnaces heating our homes to driving to the store to getting haircuts to manufacturing products. Hence, energy supply limitations can translate into higher energy prices, just as more energy supply can result in lower energy prices. Energy is so foundational that energy prices permeate through the rest of the economy.

Iran’s oil is not inconsequential. Iran may not have a dominant market share, but its oil production is large enough to raise oil prices. Using back-of-the-napkin math, losing Iranian oil completely could have raised oil prices to $75.50 from February’s ending price of $72.48. The current oil price, hovering around $100, reflects the shuttered Strait of Hormuz and the risks of a prolonged conflict or a prolonged reduced oil supply.

To go one step further, China is a major manufacturer of products. We’ve all seen the “Made in China” labels. Product manufacturing requires energy. So, increasing a fundamental cost, energy, could drive up the prices for the finished goods. The conclusion that a Middle East conflict will drive up inflation is well supported.

With this in mind, questions have arisen about vehicles that can hedge inflation risk. The natural conclusion is to consider inflation-protected bonds, or bonds whose principal reflects inflation changes. There are a few options, but Treasury Inflation Protected Securities (TIPS), issued by the U.S. Treasury, are the most notable. It should be noted that TIPS have not held up to their promises. The above chart demonstrates that TIPS have no correlation to inflation. Another promoted suggestion is commodities, which come with spectacular price swings that are more correlated to speculation and fear than actual inflation.

The reality is that near-term inflation hedges are difficult to come by. This is mostly due to the imprecise variability in the short term. Long-term, stocks tend to be the best long-term hedge as companies can adjust their wares to reflect underlying price increases. Of course, stocks come with potentially dramatic near-term volatility. In the end, there is no perfect inflation hedge. It’s best to isolate near-term cash needs with cash equivalents and short-term bonds to allow your portfolio to weather near-term volatility and near-term inflation risks, while giving stocks the ability to outpace inflation in the long term.

1U.S. Energy Information Administration      2Visual Capitalist