Oil is the lifeblood of the economy — and the key to the stock market during the Iran war
Black gold, Texas tea, dino juice, or whatever you want to call it, oil is the lifeblood of the global economy. Whether it’s the ability to wage war, build data centers, or manufacture everyday goods, the primary input is energy. And there’s no more crucial energy source than oil. For that reason, stock market investors always need to be aware of where oil is trading. But with a war in the Middle East underway that threatens to disrupt supply, the price of oil is garnering the bulk of stock investors’ attention. In normal times, the first week of the month usually means the market is anticipating Friday’s jobs report because it’s a key indicator of the health of the U.S. economy. In an economy that relies heavily on consumer spending, people need to be employed for growth to keep chugging along. But this week, the question of how many jobs the U.S. added in February takes a back seat to the price of oil. Where crude goes — and how long it stays there — carries significant implications for the economy and the earnings of the companies operating within it. And, over time, earnings are ultimately what drives stocks. That’s why, no matter the sector of the economy or market in question, investors have to consider the price of oil. A company’s income statement is nothing more than revenue minus expenses, resulting in a profit (or loss). So, when a major input such as oil is up double-digit percentages in two days, it’s fair to worry about near-term pressure on profit margins because companies can’t immediately pass through the higher costs. That’s not where the pain ends. When an input cost rises, companies have three choices: 1) eat the cost, 2) pass it through to their customers, or 3) some combination of the two. Each option has associated problems. If the costs are eaten, we get profit pressure and a decline in stock prices. If the costs are passed through, inflation is likely accelerate, resulting in less buying power for the American consumer, which can pressure sales and, in turn, corporate profits. That, of course, is compounded by the direct impact of higher energy prices on consumers, such as when filling up the tank of heating one’s home. There is also the Federal Reserve response to consider. Wall Street breathed a small sigh of relief when President Donald Trump nominated Kevin Warsh to be the next Fed chair, believing that Warsh would look to lower rates, in accordance with the president’s wishes. A tick up in inflation, however, throws a bit of a wrench into things. Yes, the Fed’s preferred measure of inflation — the core PCE index — strips out the impact of food and direct energy costs because those tend to be more volatile and central bankers want to focus on underlying trends. But the ex-food and energy inflation rate doesn’t remove the indirect impact that higher crude prices have on other goods and services — most prominently, the cost of trucking and making plastics. So, either way, an increase in energy costs is going to be inflationary and that goes against the notion of lower rates. We put together a flow chart to help illustrate how energy prices impact the economy and eventually the stock market. As we can see, higher energy prices really aren’t good for anyone — except, of course, for the energy companies selling it. Some companies are able to contractually pass the costs through, such as Club holding Linde , and that helps to some degree. But it won’t be able to fully blunt the hit to profits if customers pullback on orders. And if there are sustained higher energy prices, we’d fully expect to see that happen due to lower end market demand. All paths lead to lower stock valuations. The bottom line: When it comes to gauging the economic impact the Iran war may have on Americans and the stock market, look no further than the price of oil — and to what extent will it raise corporate input costs and squeeze consumers’ discretionary budgets. If the price spike recedes quickly, the impact will not be felt as much. In other words, it’s not just about how high oil prices get, but also how long they stay there. As a result, for those looking to better understand the economic impacts this war may have on Americans and in turn the stock market, look no further than the price of oil and ask to what extent it can impact corporate input costs and consumer discretionary budgets as that will dictate how you think about the stock market and your own individual holdings. Of course, should prices recede quickly, the impact will be less felt. So, it’s not just about high oil prices can get, but also how long they stay there. For example, Russia’s invasion of Ukraine in early 2022 led to a sustained increase in oil prices that had a serious economic impact. Consumer inflation reached its post-Covid peak at 9.1% in June 2022 . During that month, U.S. oil benchmark WTI crude traded well above $100 a barrel , as did it for multiple months that year. That ushered in an aggressive Fed rate-hiking cycle. By contrast, in June 2025, we saw a multi-week increase in WTI coinciding with the Israel-Iran war, trading into the mid-to-supper $70s a barrel. But once a ceasefire was reached, oil prices tumbled back into the mid-$60s. On Tuesday, WTI traded as high as $77.98 a barrel, before giving up some of those gains and trading up roughly 4% to around $74 this afternoon. We don’t think it’s a coincidence that oil coming off its highs of the day has coincided with stocks moving well off their session lows . The situation is very dynamic at the moment and updates are coming at a mile a minute. However, as long-term investors, it’s important to remember that the money is made when you buy and the goal is to buy low. So, while days like Tuesday can be scary, it’s crucial to keep calm and be discerning. Which stocks are being hit that are either less prone to the fluctuations in oil? Or which names can bounce back quickly if concerns about global oil supplies are resolved soon? As Jim Cramer explained earlier Tuesday, “Those who flee in moments like this can never get back in.” (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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