Oil Price Spike Puts Developers, Fed In 'Wait-And-See' Mode

Military conflict between the United States and Iran has caused the largest crude futures weekly price spikes since before the turn of the century.

Continued oil price escalation could quickly freeze interest rates and delay construction projects, with one trade group saying the latter is already happening. Oil prices are driving economic uncertainty and eroding the confidence of developers, who had just started to rebuild.

Oil prices shot up 12% for West Texas Intermediate and 8.5% for Brent for the week ending Friday, also some of the most significant short-term increases in decades, after the conflict began Feb. 28. 

The preconflict average price for a barrel of oil was about $65. Brent and WTI broke $90 per barrel on Friday as President Donald Trump said there will be no deal with Iran except unconditional surrender. 

The Strait of Hormuz is effectively paralyzed, stocks have plunged, and concerns about a prolonged rise in oil prices are mounting. If the strait closure persists in the coming weeks, oil prices could reach record highs of $150 per barrel, Qatar's energy minister told the Financial Times.

For developers plagued by inflated construction costs and prolonged uncertainty, this conflict may be the factor that indefinitely delays projects. Oil and gasoline prices affect all parts of the construction process, from contractors’ commutes to the transportation of materials and the powering of equipment. 

“There was some indication of stabilization coming into 2026,” said Anirban Basu, chief economist for trade group Associated Builders and Contractors. “But this war has really quashed that.” 

Overall construction input prices were 2.3% higher in January compared to a year prior, according to an ABC report, which attributed the rise to tariffs. Commercial construction materials costs had already surged 40.5% from February 2020 to January 2025. 

Now, the Iranian conflict is another reason for developers to wait and see how the economy is impacted before starting construction, Basu said. A spike in oil prices increases the risk of a recession, making it less appealing for developers to begin construction and potentially deliver during a downturned market.

This is especially true for privately financed projects, which may rely on consumer or property sales to pencil. 

The oil price spike may not halt ongoing or delay all projects, but it’s likely to impact those with little margin built into budgets, said John Diamond, a senior fellow at Rice University’s Baker Institute for Public Policy.

“Those that just barely covered the return on investment, there's going to be a lot of those that no longer make sense,” Diamond said.

Delaying a construction project comes with its own costs, since contractors reserve capacity with project owners and may be needed at the last minute when the project resumes, Basu said. 

But it’s cheaper to delay or cancel a project than deliver it to a marketplace in “woeful shape,” like homebuilders experienced when they delivered houses in 2008 or 2009. 

“Those homebuilders would have preferred if they had not started those homes in the first place,” Basu said. 

High oil prices push up the cost of transportation and of anything with petrochemicals as inputs, contributing to inflation. This could force the Federal Reserve to take a more hawkish stance regarding interest rates, Trepp Chief Economist Rachel Szymanski said.

“With the oil price spike, they’re probably going to take a wait-and-see stance to see if it’s transitory or more persistent,” Szymanski said. “A lot of geopolitical events tend to be more transitory on the cost side.” 

But Trump hasn’t shown significant interest in bringing the conflict to a swift end. He told Reuters on Thursday he didn’t have any concern about higher gasoline prices. 

“If they rise, they rise, but this is far more important than having gasoline prices go up a little bit,” the president said. 

Iran exports about 2 million barrels of oil per day, and it is “working like hell” to stop the flow of oil to punish the global economy, University of Houston energy fellow Ed Hirs said. 

About 20% of the global oil supply passes through the Strait of Hormuz. A prolonged decrease in supply would have an outsized impact on prices, he said. 

“For a 10% decrease in supply, the price will go up 250%,” Hirs said.

Contractors have already reported some project delays to the ABC, and there could be ripple effects, Basu said.

“This kind of geopolitical instability tends to put upward pressure on insurance costs,” he said. “That’s not necessarily just a short-term impact. The ripple effects can be lengthy.” 

Construction takes months to years, so market conditions at delivery can be hard to predict. Developers want to be confident that they’ll deliver projects in a strong economy, and uncertainty brought by the Iranian conflict and spiking oil prices puts that further out of reach.

“It really can rob the marketplace of confidence,” Basu said. “Developers love to have a sense of how their projects are going to be embraced by the marketplace.”