At first, the conflict in the Middle East was framed almost entirely through a military lens.
- Would there be regime change in Iran?
- Were the strikes tactical or strategic?
- How might the regional balance of power shift?
But markets have quickly moved on to a different question: energy supply. Once conflict threatens oil infrastructure and shipping corridors, it stops being a distant geopolitical headline and becomes something far more immediate – an inflation story. And inflation eventually lands in household budgets everywhere.
Why the Strait of Hormuz Matters
At the centre of the concern is the Strait of Hormuz, one of the world’s most critical energy choke points. A significant share of global oil and gas exports move through this narrow corridor each day. When that flow looks even slightly at risk, markets react quickly. Oil surged toward US$120 a barrel before easing after Donald Trump signalled a potential release from the Strategic Petroleum Reserve. The pullback helped, but prices remain elevated and volatile. That volatility tells you the market still believes the risk is real.
Where Australians Feel It First
For Australians, the impact appears first at the petrol station. Fuel prices have already started climbing in parts of the country, sometimes with suspicious enthusiasm. But petrol is only the first step.
If energy prices stay elevated, the pressure spreads through the economy:
- Freight costs rise
- Logistics become more expensive
- Food distribution costs increase
- Retail prices creep higher
Energy sits inside almost every supply chain. When oil moves, eventually everything moves with it. That’s when inflation becomes the real concern.
Why the Reserve Bank Is Watching Closely
This is where central banks start paying attention.
The Reserve Bank of Australia has already signalled it is monitoring the situation, with Governor Michele Bullock noting they would act if inflation risks intensified. The challenge is that this type of inflation is imported. It’s driven by supply disruptions rather than excessive spending – which makes it harder for interest rate policy to manage. Central banks can slow demand, but they cannot increase global oil supply.
The Behaviour Risk
There is also a psychological dimension. During the COVID-19 pandemic, panic buying briefly emptied supermarket shelves. The same dynamic can occur in fuel markets if consumers begin hoarding or topping up more frequently. When people start taking more than they need from the system, shortages can quickly become self-fulfilling.
Markets Are Trading Fear as Much as Oil
Right now, oil prices are moving not just on physical supply but on expectations. Every headline, tanker movement or political statement can shift markets within minutes. Energy has effectively become a geopolitical barometer. The conflict may be unfolding thousands of kilometres away, but the economic effects travel quickly through energy prices, transport costs, and supply chains. And that’s why this is no longer just a war story. It’s an inflation story.
To find out how we can help see our Capital Management.