The next few weeks leading up to the US midterm elections on 3 November could be particularly volatile for investment markets. At the centre of the political battle is an issue far more immediate to American voters than foreign policy or government debt. It is the price of fuel, particularly diesel, and the growing financial pressure on the industries and communities that depend on it.
Farming, construction, mining, and transport are all heavily dependent on diesel. When prices rise sharply, the consequences flow through almost every part of the economy. These are also communities that have traditionally provided strong support for Donald Trump and the Republican Party. Rising fuel costs threaten that support at exactly the wrong time. With control of both houses of Congress at stake, the Republicans can’t afford to lose voters.
Trump understands the political consequences. His determination to bring energy prices down was highlighted on 9 October when he announced an extraordinary agreement with Vladimir Putin for Russia to supply diesel to American and global markets. The agreement involved Washington easing sanctions imposed on Russia over its invasion of Ukraine. Regardless, it is a remarkable reversal of policy and it demonstrates the political urgency surrounding energy prices.
But there is another side to this equation. Iran has its own reasons to want Trump politically weakened. With the conflict between Iran and the United States continuing, sustained pressure on global energy supplies serves Tehran's interests. Higher oil prices hurt American consumers, damage business confidence and increase the political cost of the conflict for the administration. Whether Iran is deliberately seeking to influence the election is impossible to establish, but the potential political consequences are difficult to ignore.
This creates a difficult situation in the lead-up to the 3 November vote. Trump has a strong incentive to contain energy prices and avoid further disruption before the election. Meanwhile, Iran has little reason to make that task easier. I suspect the recent escalation by the Iran backed Houthis in Yemen, including attacks on Saudi infrastructure, are directly related to this political calculation.
What concerns me more is what happens after 3 November. Once the election is over, the immediate political pressure to contain fuel prices diminishes. I think Trump will feel considerably less constrained in his response to Iran, particularly if he believes a more aggressive military campaign could bring the conflict closer to a conclusion. Further air strikes, attacks on critical infrastructure or a broader escalation of American military involvement are all possibilities. After the midterms, if Trump believes a more aggressive approach to Iran is necessary, I think he will be prepared to accept considerably higher oil prices as a consequence.
None of these outcomes is inevitable, but the political calculations will change quickly once the votes have been counted.
For investors, this matters because energy prices influence inflation, interest rates, corporate profitability, and economic growth. Another significant disruption to oil supplies would arrive when financial markets are already dealing with considerable uncertainty.
My concern is that investors may be concentrating too heavily on the election itself and not enough on what follows. I see a meaningful risk of higher energy prices in the months ahead, with consequences extending well beyond the oil market. The greatest risk may have less to do with how Americans vote than what happens once they have, regardless of the outcome.
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