Iran, Energy Prices, and What It Means for Your Portfolio

Nobody Knows What Happens Next

That's not a dramatic opening — it's the honest starting point for any serious analysis of what's happening in the Middle East right now.

The US military posture toward Iran has shifted significantly in recent weeks. Carrier strike groups have been repositioned, diplomatic language has hardened, and the rhetoric from the White House has oscillated between restraint and escalation — sometimes within the same press conference. Allies are struggling to read the situation. Markets are struggling too.

The core problem isn't just what's happening on the ground. It's that nobody — not NATO allies, not intelligence agencies, not even senior figures within the US administration — appears to know which way Donald Trump is leaning. His decision-making on foreign policy has always been improvisational, driven as much by domestic political calculus and personal instinct as by the briefings in front of him. That unpredictability, which some argue is a deliberate negotiating tactic, creates a specific kind of risk that financial markets find very difficult to price.

When you can model the range of outcomes, you can hedge. When you can't even define the range, you get volatility.

The Strait of Hormuz Problem

To understand why Iran matters to energy prices — and therefore to inflation and portfolios — you need to understand one piece of geography: the Strait of Hormuz.

Roughly 20% of the world's oil supply passes through this narrow waterway between Iran and Oman. That's around 20 million barrels per day. It's also a critical route for liquefied natural gas (LNG) shipments from Qatar, the world's largest LNG exporter.

Iran has repeatedly demonstrated both the capability and the willingness to disrupt this chokepoint. During periods of heightened tension, even the threat of disruption is enough to move oil prices. In 2019, attacks on tankers in the Gulf of Oman — widely attributed to Iran — sent Brent crude up 15% in a single week before prices settled back.

A full military confrontation would be a different order of magnitude. Analysts at major investment banks have modelled scenarios ranging from targeted strikes (oil at $100–110) to a broader regional conflict with sustained shipping disruption (oil at $120–150+). The current Brent price of around $85 reflects uncertainty, not resolution.

From Oil to Inflation

The transmission mechanism from energy prices to consumer inflation is well understood and surprisingly fast.

Oil feeds into the price of virtually everything. Transport costs rise immediately — every lorry, ship, and delivery van runs on diesel. Manufacturing costs follow. Petrochemicals are embedded in products from plastics to pharmaceuticals. Food prices respond quickly because agriculture is energy-intensive at every stage: fertiliser production, machinery, processing, refrigeration, and distribution.

The UK is particularly exposed. Despite being a net energy producer in some categories, the UK prices its energy on international markets. A spike in global oil and gas prices feeds directly into wholesale energy costs, which feed into the energy price cap, which feeds into household bills and business operating costs.

We've seen this film recently. The energy price shock following Russia's invasion of Ukraine in 2022 pushed UK CPI inflation to 11.1% — the highest in over 40 years. It took two years of aggressive monetary tightening by the Bank of England, with base rates reaching 5.25%, to bring it back toward target.

That episode is still fresh. The Bank of England has only recently begun cutting rates, and the economy is still adjusting. A second energy shock, before the first one has fully worked through, would land on an economy with less room to absorb it.

What This Means for Portfolios — In Theory

It's worth understanding how energy-driven inflation feeds through to different parts of a portfolio — not to alarm you, but so you know what you're looking at if markets get choppy.

Bonds are the most sensitive. If inflation rises faster than expected, the fixed payments from bonds buy less, and bond prices tend to fall. This is what happened in 2022, and it caught a lot of people off guard — particularly those in default pension funds with heavy bond allocations.

Equities are more mixed. Companies with pricing power — energy firms, consumer staples, commodity producers — can often pass higher costs through. The broader market may dip in the short term as central banks respond with rate rises, but equities have historically recovered from every inflationary episode given enough time.

Cash quietly loses value. If inflation runs at 6% and your savings account pays 3%, you're going backwards in real terms. It feels safe, but it isn't — not over the long run.

Real assets like property and commodities tend to hold up better during inflationary periods, since their prices often rise with the cost of living.

None of this is new. These dynamics play out every time there's a supply shock, and they've played out many times before. The pattern is well understood — and so is what tends to happen next.

We've Been Here Before

If any of this sounds familiar, it should. We wrote about exactly this dynamic in Ignore the Headlines — the idea that the biggest risk to your portfolio during a crisis isn't the crisis itself, but your reaction to it.

The evidence hasn't changed. Dalbar's research consistently shows that the average investor underperforms the market — not because they pick the wrong funds, but because they sell at the wrong time. JP Morgan's data shows that missing just the ten best days in a 20-year period cuts your return nearly in half. And those best days almost always come within weeks of the worst ones.

The 2022 energy shock was a perfect example. UK inflation hit 11.1%. Bond markets had their worst year in decades. Headlines were apocalyptic. And investors who stayed the course recovered. Those who panic-sold locked in losses and missed the bounce.

Iran could escalate. Oil could spike. Inflation could tick up again. All of these things are possible. But the historical record is clear: geopolitical crises come and go, markets absorb the shock, and the people who didn't react tend to come out ahead.

Be Aware, Not Alarmed

This isn't a post telling you to bury your head in the sand. It's good to understand what's happening and why it matters. The Strait of Hormuz is a real chokepoint. Energy-driven inflation is a real transmission mechanism. These are facts worth knowing.

But knowing them should give you confidence, not anxiety. When you understand how a geopolitical event could affect your plan, you can assess whether your plan is built to withstand it — rather than panicking because a headline told you to.

The sensible things to consider:

Check your diversification. If your portfolio is heavily concentrated in one asset class or region, any shock will hit harder than it needs to. Genuine diversification — across equities, bonds, real assets, and geographies — is the closest thing to a free lunch in investing.

Understand your inflation exposure. Know which of your income sources are inflation-linked and which aren't. The State Pension rises with the triple lock. A fixed annuity doesn't. That distinction matters.

Don't try to trade the outcome. Oil prices might spike to $120 or settle at $80 once diplomatic channels open. You don't know. Professional traders don't know. The President himself may not know yet. Positioning your portfolio around a geopolitical outcome you can't predict is speculation, not planning.

Trust the process. If you have a diversified plan with a sensible time horizon, it already accounts for periods like this. That's what diversification and long-term investing are for. The plan doesn't need to change every time the news does.

Model It If You Want Peace of Mind

If the headlines are keeping you up at night, the best antidote isn't more news — it's numbers. What actually happens to your retirement plan if inflation runs at 5% for three years? What if markets drop 25%? You don't need to predict which scenario will play out. You just need to know whether your plan survives them.

You can stress-test your plan for free using Monte Carlo simulation. Run 1,000 scenarios — including crashes, inflation spikes, and everything in between. Most people find that their plan is more resilient than they expected. And that knowledge is worth more than any headline.

Further Reading

• Hamilton, J. (2009). "Causes and Consequences of the Oil Shock of 2007–08." Brookings Papers on Economic Activity, Spring 2009, 215–261.
• Baumeister, C. & Kilian, L. (2016). "Forty Years of Oil Price Fluctuations: Why the Price of Oil May Still Surprise Us." Journal of Economic Perspectives, 30(1), 139–160.
• Bank of England. (2023). Monetary Policy Report, November 2023.
• Office for National Statistics. (2023). "Consumer price inflation, UK: October 2022." Statistical Bulletin.
• Ilmanen, A. (2022). Investing Amid Low Expected Returns. Wiley.
• Related: Ignore the Headlines: The Biggest Risk to Your Portfolio Is You