The S&P 500, the most closely watched US index, has risen by more than 8.5% since the start of this year, a performance that few would have predicted at the end of February, given the five months of war that followed.
The United States and Israel attacked Iran on 28 February, and traffic through the Strait of Hormuz, through which roughly one-fifth of the world's oil normally passes, remained severely restricted for most of the following months.
The June memorandum appeared to mark a turning point, suggesting that the worst was over. That assessment proved premature. Fighting resumed in July, and traffic through the strait came to a virtual standstill.
The second closure carried greater risk than the first, even though the oil price per barrel remained below $100 for an extended period. In the initial phase of the conflict, the market was cushioned by high inventories, oil held on tankers awaiting delivery and the release of emergency reserves. Since the start of the war, however, wealthy countries had drawn down nearly 300 million barrels from those reserves. By the time of the second closure, this buffer had narrowed considerably, leaving markets with less room to absorb a renewed shock.
Even on this occasion, there was no panic sell-off. Brent crude traded in a range of $71 to $101 per barrel in July, yet the S&P 500 stayed close to its all-time highs, a divergence that suggests markets no longer view high oil prices as posing the same threat to the United States that they did in the 1970s.
The West Has Decoupled Growth from Oil
This reasoning has a rational basis. Western economies today require significantly less oil to generate one dollar of GDP than they did half a century ago. Vehicles have become more fuel-efficient, part of the transportation sector is shifting to electricity, and a growing share of economic output now comes from services, software and other sectors whose performance is not directly tied to the volume of oil consumed.
In developed countries, fuel consumption in road transport had already plateaued by 2025. More efficient vehicles, hybrid powertrains and gradual electrification have offset the effect of rising economic activity on fuel demand.
Underlying this shift is a broader change in how modern life is organized. Remote work has reduced daily commuting, car ownership is no longer treated as a default marker of success in large cities, and public transportation and delivery logistics play an increasingly central role. Markets appear to be pricing in an economy where rising living standards no longer translate directly into higher gasoline consumption.
The Shifting Geography of Oil Demand
In recent years, global oil demand has been driven increasingly by emerging economies, particularly in Asia, with the United States and Europe no longer the primary force behind consumption growth. These economies are now passing through a stage of development the West went through decades ago, marked by rising car ownership, air travel, industrial output and plastic consumption. As living standards rise, they are adopting the consumption patterns long associated with the West.
This phase, however, is unlikely to persist indefinitely. Emerging economies are already moving toward more fuel-efficient vehicles, electromobility and digital services. The key question is whether this transition will proceed quickly enough to offset the demand growth generated by rising living standards and industrial expansion. The petrochemical industry and air travel, in particular, are likely to remain dependent on oil for the foreseeable future.
Why Traders Chose Chips over Crude
Shifting lifestyles are not the only factor tempering the impact of high oil prices. Since the start of the year, market attention has been dominated by the artificial intelligence supercycle. Headlines on the closure of the Strait of Hormuz were effectively competing for investor attention with reports on memory chip manufacturers, whose share prices climbed by double-digit percentages in a single week. As a result, speculative capital gravitated toward chips and data centers rather than toward the far more volatile oil market.
Donald Trump's role was also significant. Oil prices moved repeatedly in response to his statements on further strikes, a possible ceasefire or the resumption of negotiations with Iran, with the president capable of reversing his position within hours. This volatility made it exceptionally difficult for traders to separate long-term supply fundamentals from short-term political signaling. In a market where prices hinged on the president's next remark, oil trading increasingly resembled a bet on being first to the right information rather than a conventional analysis of supply and demand.
Big Oil's Profits Come with Strings Attached
High oil prices are not uniformly bad news for the US stock market. ExxonMobil, Chevron, ConocoPhillips and Occidental Petroleum are estimated to have earned a combined $31bn in the second quarter, up from just $12bn in the same period last year. These higher energy sector profits are partially offsetting the pressure that elevated fuel prices are placing on airlines, transportation companies and consumer goods firms.
At first glance, this might suggest that oil companies are eager to answer Trump's call to "drill, baby, drill". Yet although US production has reached a record 13.8 million barrels per day, this growth is driven largely by efficiency gains at existing wells rather than new investment. Companies remain wary of committing to a fresh investment cycle, given the risk that prices could fall sharply once the war ends. Shareholders, for their part, are pushing for dividends and buybacks rather than costly expansion.
Nor is the war itself an unambiguous benefit for the sector. While higher prices lift revenues, the conflict simultaneously exposes tankers, export routes and high-value infrastructure in the Persian Gulf to risk. An Iranian strike, for instance, caused severe damage to the Pearl plant in Qatar, one of Shell's most valuable assets, with part of one production line expected to remain offline for at least a year.
The oil sector's alignment with Trump is therefore more limited than it might appear. The president is seeking faster production and cheaper gasoline ahead of the election, while companies are prioritizing high prices, regulatory stability and shareholder returns. The two sets of interests overlap only partially.
Oil's Waning Grip on the Economy
Recent months have demonstrated that oil no longer holds the same sway over the Western economy that it did half a century ago. The West now requires less energy per unit of economic output, US production stands at record levels, and higher prices are lifting at least part of the stock market index. As a result, a barrel at $100 no longer translates automatically into a recession, particularly once inflation is taken into account, a price level far less extreme than during past oil crises.
The resilience observed so far, however, has its limits. Markets can absorb expensive oil provided its price is at least reasonably predictable. What they struggle with is a scenario in which the price per barrel swings between $70 and $110 within a matter of weeks, driven by each new attack, ceasefire or presidential statement. Under those conditions, companies lose visibility over their cost base, and nervousness returns to the market.