Gas Prices Go Up Like Rockets, and Fall Like Feathers
Gasoline prices do not wait for facts. They move on fear, probability, and replacement cost. When crude oil spikes on headlines out of Iran or the Strait of Hormuz, prices at the pump respond almost immediately, even though nothing has physically changed yet. And when those same risks fade, prices drift lower at a far more patient pace. This is often dismissed as unfair or inefficient, but it’s neither. It’s the system doing exactly what it is designed to do: pricing the future before it arrives. That dynamic, sometimes called “rockets and feathers,” is more than a quirk of energy markets; it’s a clue. It reveals how shocks propagate, how inflation re-emerges, and why markets often react long before the data catches up.
In this edition of The Family Office Chronicle, we will examine current events in the light of long-term history. Why do prices at the pump seemingly jump instantly at any sharp rise in crude prices, and why do they go back down so slowly? Are crude prices and stock market returns correlated? What is risk premium, and how does it affect the prices of commodities and stocks? What does all this mean for investors and their portfolios?
What to Make of the Current Energy Situation
The war in Iran began on February 28th, but we imagine most people don’t know what the impact of the six-week kinetic war and the closing of the Strait of Hormuz has had on oil prices, and most will be surprised by the facts. Since late February and as of May 8th, Brent crude rose from about $71 per barrel to over $120, and has fallen to about $100; a reminder that geopolitical risk premiums can enter the market quickly, but also unwind rapidly once investors begin pricing the possibility of resolution rather than escalation.
Most people experience a familiar dynamic at the gas pump: prices jump quickly, they linger, they fall slowly. It feels personal and arbitrary, and it seems essentially unfair, but it’s actually structural—it’s designed to work that way. Let’s work through it.
It’s important to know that wholesale crude oil reprices instantly. Oil markets react in real time to geopolitical news, demand drivers, and refinery disruptions. Retail gas stations are downstream from this, so price increases flow through within days, and sometimes hours. Furthermore, unlike most industries, gasoline inventory is short-cycle. Gasoline supply chains are fast-moving and low-inventory relative to demand. Stations turn over fuel quickly, often every few days. That means they can’t wait out higher prices, and they must adjust quickly to avoid losses.
On top of that, the energy sector generally uses Last In/First Out (LIFO) accounting standards. Gasoline prices reflect the cost of the next barrel, not the last one. When crude rises, refiners and distributors must price fuel based on replacement cost. When crude falls, however, the system works through higher-cost inventory first, and prices fall only after that higher-cost inventory clears.
The bottom line is this: Retail fuel prices are forward-looking in a rising market and backward-looking in a falling one, which is why they adjust faster on the way up than on the way down. This asymmetry is not a flaw; it’s a feature of forward-looking markets. Once you see it clearly, it becomes easier to recognize the pattern.
Inflation and Energy
Energy is not just another commodity. It is an input into nearly everything: transportation, manufacturing, food production, logistics, and services. When energy prices rise sharply, the effects move outward. Freight costs increase, input costs compress margins, and consumers face higher everyday expenses. Businesses adjust their pricing, often reluctantly at first, and higher interest rates and wages eventually follow.
This is exactly the pattern we’ve seen over the past several years. Recently, the post-pandemic period saw oil move from below $40 to over $100. That surge fed directly into the inflation cycle of 2021–2022, pushing consumer prices higher across multiple categories. Inflation dominated headlines in this period, as the CPI rose from about 2% to 9%.
The Federal Reserve raised rates at the fastest pace in decades to contain inflation, while a tight labor market pushed wage growth upward as employers competed for workers. The result was a dual adjustment; capital became more expensive, and labor became more costly, multiplying the broader impact of inflation across the economy.
Crude oil prices and inflation are episodically correlated, particularly during supply shocks, but not tightly correlated across long time periods. However, the impact of crude oil prices on the stock markets has been a much more nuanced story.
History does not repeat perfectly, but it rhymes with remarkable consistency. In the 1970s, OPEC production cuts and geopolitical tensions drove oil prices sharply higher. The result was not just higher energy costs, but a prolonged period of inflation that reshaped economic policy for a generation.
In 1990, the Gulf War created a sharp spike in crude prices, contributing to a recession that followed shortly after. In 2008, oil reached over $140 per barrel—roughly $215 in today’s dollars. It was not the cause of the financial crisis, but it acted as an accelerant in an already fragile system. The pattern is not exact, but the role of energy prices in these broader economic cycles is notable.
Correlation and Its Limits
Investors often look for straightforward relationships. Oil up, stocks down. Oil down, stocks up. Reality is more complicated. In the short term, the correlation between crude oil and equity markets is unpredictable. At times, rising oil prices coincide with strong equity performance, particularly when driven by economic growth. At other times, rising oil reflects supply constraints, which can pressure corporate margins and reduce earnings expectations.
Oil does not move markets in one direction, but for the seasoned investor, it reveals the health and longevity of the economic ecosystem underneath.
At times, rising oil prices coincide with strong equity performance, particularly when driven by economic growth. From 2003 to 2007, for example, crude oil quadrupled, from a low near $30 per barrel to about $140 per barrel, as economic expansion accelerated across developed and emerging economies. In periods like that one, energy demand reflects strength, not stress; between ‘03 and ‘07, the S&P 500 rose from about 800 to 1,500.
At other times, rising oil reflects supply constraints. The 1970s oil embargo, the Gulf War in 1990, and the 2022 energy shock all share a common pattern: crude prices rose not because growth was accelerating, but because supply was disrupted or threatened. In those environments, higher energy costs compress margins, fuel inflation, and often coincide with weaker market performance.
During the OPEC embargo of ‘73-’74, the S&P 500 lost 40% of its value. In the brief Gulf War of 1990, as oil prices doubled from $20 to $40, the S&P dropped 20%.
Over longer periods, however, a more reliable relationship emerges. Sustained increases in energy prices tend to coincide with higher inflation, increased market volatility, and slower economic growth. Higher energy prices don’t always lead to recessions, but often create the conditions that precede one.
This is why research from multiple Federal Reserve studies has noted that a significant number of post-war recessions were preceded by meaningful increases in oil prices. The takeaway is this: energy does not cause every downturn, but it often reveals underlying stress.
The Difference Between Shock and Structure
Not all oil spikes are the same; some are structural. The 1970s were driven by supply constraints and limited alternatives to OPEC production. The economic system had fewer ways to respond. Production was concentrated, and technology was limited. Inflation persisted because the underlying imbalance persisted.
Today is different. The U.S. is the #1 producer of total energy globally, including oil (crude and liquids), natural gas, renewables, and nuclear. As for oil specifically, the U.S. is also the largest crude oil producer in the world, ahead of Saudi Arabia and Russia. This shift from dependence to becoming a net exporter of energy has reshaped the world.
The United Arab Emirates (UAE) announced its withdrawal from OPEC and OPEC+ effective May 1, 2026. Analysts described it as a major blow to OPEC cohesion because the UAE was one of the cartel’s largest and fastest-growing producers.
The UAE is just the latest exit from OPEC. Angola exited OPEC effective January 1, 2024, following disputes over production quotas. Qatar left in 2019, Ecuador left in 2020, and Indonesia suspended participation again in 2016. This year, the regime change in Venezuela, with the largest proven reserves in the world, effectively exited OPEC as well.
Advances in drilling, including shale and fracking, have increased supply flexibility. Global markets are more responsive as a result, and that matters because it means many modern oil spikes are not structural shortages. They are risk premiums.
The Risk Premium and Natural Prices
When tensions rise in regions like the Strait of Hormuz, markets do not wait for supply to disappear. They price the possibility that it will. A tanker rerouted, a shipping lane threatened, a headline suggesting escalation? Crude rises, gasoline price spikes follow. The system moves before the outcome is certain.
History shows us that when those risks subside, the premium unwinds as uncertainty fades and inventories normalize. That unwinding process takes longer than the headlines-to-spikes process. This is why oil can move from $70 to $110 quickly, and then drift back toward equilibrium over time as that higher-priced inventory is worked off. Not because markets are irrational, but because they are probabilistic.
Investors often ask: What is the “natural” price of oil? There is no single answer, but there is a useful way to think about it. The natural price is where oil would trade without the geopolitical premium, based on supply, demand, and production costs.
The natural price of oil is not a number so much as a range. Without the Iran/Hormuz premium, current fundamentals may point back toward the $60s or $70s per barrel. But if supply chains, inventories, or infrastructure remain impaired, the market may treat $90 to $100 oil as the temporary clearing price even after the headlines improve.
In recent years, the natural price has often been estimated in the $60 to $80 range, depending on global growth and OPEC behavior. When prices move above that range, as they have now, the question becomes “Is this structural or temporary?”
If the answer is temporary, history suggests prices tend to revert once the risk dissipates.
Not immediately, but over time. Because the proximate cause of the current risk premium is the conflict in the conflict with Iran, many would suggest that the current situation is temporary. The administration has been making that argument very strenuously.
For investors, the temptation in moments like this is to react, to give in to their fight or flight instincts. To chase the obvious winners (buy), or to reduce exposure (sell). Or to make one of the biggest and most expensive mistakes in all investor behavior—to assume the current trend will persist. As we have many times in the past, we remember the wise words of Yogi Berra, “It’s tough to make predictions, especially about the future.”
When the price of crude rises due to structural changes, the second-order effects are pretty straightforward: higher energy costs influence inflation, inflation influences interest rates, and interest rates influence valuations, borrowing costs, and capital allocation.
By the time those effects fully play out, the original catalyst may already be largely forgotten.
Signal vs. Noise
The current energy situation is an example of a cautionary tale. The headlines are loud, the price moves are visible, and the temptation to act is strong. Long-term outcomes are rarely determined by reacting to the first signal; they are shaped by understanding how that signal moves through the system.
To try to understand what is a signal and what is noise, it might be helpful to review the fact pattern in this cycle. Here are the strongest current data points: the S&P 500 Total Return Index is up roughly 8.0% YTD in 2026 as of May 6. At the same time, crude oil prices have risen dramatically. West Texas Intermediate crude is up roughly 56%–60% year-over-year, and Brent crude has traded near $100–115/barrel during the Iran/Hormuz disruptions. What makes this especially interesting is that equities initially sold off as oil spiked, but then recovered strongly even while energy prices remained elevated.
When we see higher oil prices combined with higher stock prices, we have a clue that the oil prices are temporary, and not structural. We see risk premiums affecting the prices of oil, but not yet affecting equities. In other words, more noise than signal.
Despite decades of oil shocks, wars, inflation cycles, and periods of uncertainty, equity markets have continued to deliver positive long-term returns. For the patient investor, shocks do not matter (even if they alarm) because they are absorbed, adjusted to, priced in, and eventually moved past.
Gasoline prices rise like rockets and fall like feathers. That is not just a frustration, it’s a reminder that markets are forward-looking when risk increases and gradual when uncertainty resolves. Energy shocks move quickly into the economy, and slowly out of it.
Through it all, the global system continues to function.
Energy is not just a commodity; it’s a signal. Not of what is actually happening but of what might happen next. For disciplined investors, the goal is not to predict every move or react to every headline. It’s to understand what those moves mean, and to stay grounded when the system is doing exactly what it is designed to do.Every portfolio has risks, and sometimes those risks only appear after a dramatic event, whether political, economic, or natural. If you aren’t sure exactly how much risk is in your portfolio, we can help with our Taxes First, Then Math Analysis. Our portfolio analytics tools can explain what your maximum downside risk is. There’s no cost or obligation for this report; it’s part of our service for our clients
