Oil markets have a funny way of going from "everything's fine" to "the world is ending" in about five minutes. That's basically what happened over the last week. Brent crude, the global benchmark, shot past $100 a barrel, climbing roughly 50% since things got hot around the Strait of Hormuz. For those keeping score, that's the little strip of water where a huge chunk of the world's oil supply passes through. So, yeah, it's kind of important.
But here's the thing about panic: it tends to overshoot. And one economist thinks that's exactly what's happening now.
Robin Brooks, a senior fellow at the Brookings Institution and former chief economist at the Institute of International Finance, has been watching the charts. He points out that markets were initially asleep at the wheel. "Markets were slow to price the enormity of what was happening a week ago," Brooks wrote. But now, with Brent up about 50% since the conflict began, he thinks traders might be pricing in the absolute worst-case scenario. It's like going from ignoring a fire alarm to assuming the whole building has already collapsed.
From Complacency to Panic, Overnight
Brooks makes a helpful comparison to the oil spike after Russia invaded Ukraine in 2022. On a similar timeline, Brent has climbed way more sharply this time around. That suggests the market mood has done a full 180—from complacency to outright panic.
When oil does this, it doesn't happen in a vacuum. The ripple effects are immediate. Energy sector funds, which are basically baskets of oil and gas stocks, have been riding the wave up. Think of funds like the Energy Select Sector SPDR Fund (XLE) and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). Even direct oil trackers like the United States Oil Fund (USO) have surged. These funds are the places investors flock to when they're bracing for economic stress from higher energy costs, or when they just want to bet on oil itself.
The Three Things That Could Pop the Bubble
So, if we're in a panic, what could calm everyone down? Brooks has a list. He outlines three specific developments that could quickly take the air out of this rally.
First, and this is almost philosophical, the closure of the Strait of Hormuz might already be fully priced in. "The Strait can't get any more closed than it already is," Brooks noted. It's a binary event—it's either open or it's not. Once the market has accepted it's closed, there's not another, *more closed* state to price in. The bad news is already in the price.
Second, it wouldn't take much to change the mood. "Even just a few" ships managing to resume transit through the strait could dramatically reduce the massive risk premium now baked into oil prices. The market is paying a huge fear tax right now. A tiny sign of normalcy could make that tax seem silly very fast.
Third, look inward. Political instability inside Iran itself could reshape the entire geopolitical chessboard. Internal pressure can sometimes lead to external policy shifts faster than any international negotiation.
The core of Brooks's argument is that right now, the oil market is being driven as much by collective psychology as by the actual barrels of supply. And when something is driven by sentiment, it can reverse just as quickly and violently as it went up. If the fear starts to ebb, the price could follow.
