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The outbreak of war with Iran has rattled energy markets and sent stocks lower — yet the reaction has been, by historical standards, surprisingly restrained. The reason is simple: most of Wall Street is betting the conflict will be over quickly. But that assumption deserves scrutiny. What happens if it isn't?
Oil prices have surged since fighting began. Brent crude hit $84 a barrel on Tuesday — up 15% from the prior week. Equity markets fell, though US stocks clawed back nearly all of Monday's losses. Bond yields ticked up modestly. For now, markets are pricing in disruption measured in days, not months.
"This is going to be temporary, and it's going to be constrained. It's a volatility issue, not a supply issue."
— Paul Christopher, Head of Global Investment Strategy, Wells Fargo Investment Institute
That view is widespread — but it's not guaranteed. President Trump's social media posts have suggested an openness to a protracted campaign, referencing the US military's "virtually unlimited" munitions stockpiles and writing that wars "can be fought 'forever.'" Meanwhile, shipping through the Strait of Hormuz has halted since the weekend, a chokepoint that carries one-fifth of the world's liquefied natural gas and a significant share of seaborne oil.
The Energy Chokepoint That Changes Everything
The Strait of Hormuz is the single most consequential piece of geography in global energy markets. Iran borders it. Goldman Sachs estimates that roughly 20% of global LNG supply transits through it. If that flow stays disrupted for weeks or months, the consequences ripple far beyond the Middle East.
"If this were to go on for weeks or months, you can't stop 20–30% of the world's seaborne oil and not have some massive reaction."
— Lucas White, Lead Portfolio Manager, GMO
White stopped short of forecasting a specific price target but said he "would not be surprised" to see oil cross $100 a barrel in a prolonged conflict scenario. That would represent a more than 30% increase from levels just before the war began — and would mark the first time oil has traded above $100 since Russia's invasion of Ukraine pushed it past $114 in May 2022.
What $100 Oil Would Mean for Inflation?
This is where markets would face a genuinely difficult dilemma. Energy costs are volatile enough that policymakers typically exclude them from their core inflation measures. But a sustained spike is a different animal. It seeps into the cost of goods, services, and — critically — heating and transportation across the global economy.
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Shannon Saccocia, Chief Investment Officer at Neuberger Berman, calls the potential for an energy supply shock "the biggest economic concern and risk right now." Her firm had been expecting a constructive backdrop for 2026: stable to falling interest rates, a soft landing, and two or three Fed rate cuts on the horizon. That picture has already started to shift.
"Markets are already expecting the Fed to be more worried about inflation this year than they were a week or two ago because of potentially higher oil prices."
— Katie Klingensmith, Chief Investment Strategist, Edelman Financial Engines
Saccocia frames the risk in terms of a feedback loop: energy prices rise, goods and services pricing follows, and eventually a tipping point is reached where high energy costs destroy demand and drag down growth. "All of this hinges on how long you're experiencing that oil shock," she says.
Europe Is More Exposed Than the US
The vulnerability is not evenly distributed. Europe relies heavily on natural gas for heating, and any sustained disruption to LNG flows would hit the continent disproportionately hard. Raphael Olszyna-Marzys, international economist at J. Safra Sarasin, warns that in a worst-case scenario — oil persistently above $100 — European inflation could rise by more than two percentage points, tipping several economies into recession.
The US is better insulated, partly because it has become a major oil producer in its own right. "Even if oil prices go up here, we're not going to go into recession," says Paul Christopher of Wells Fargo. "We produce enough of our own oil to keep the economy going." But insulation is not immunity. American consumers and businesses still face higher energy costs, and US inflation dynamics have their own momentum.
The Fed's Uncomfortable Position
Perhaps the most consequential second-order effect would be what a prolonged oil shock does to the Federal Reserve's options. The central bank entered 2026 with what appeared to be a clear path: inflation on a downward trajectory, rate cuts expected. A sustained energy-driven inflation revival could close that window — or worse, force policymakers to consider tightening into a slowing economy.
"The seeds of inflation remain in the US economy," wrote Don Rissmiller, chief economist at Strategas, in a Tuesday note. "In a sustained inflation scare, policy choices — e.g., raising interest rates — could be much more disruptive."
The base case on Wall Street remains that this ends quickly — a ceasefire in weeks, oil retreating, markets stabilizing. History, including the brief 2025 Israel-Iran conflict, which ended in roughly 12 days, supports that optimism. But the base case is not the only case. And if it's wrong, the consequences will reach well beyond oil prices and into the heart of the global economic recovery.