The Impact of Oil and Gasoline Prices

March madness was not just about basketball in 2026.  For many Americans, the price of gasoline provides the “scoreboard” that determines their outlook on the economy and propensity to spend.  Gasoline prices are prominently displayed and updated frequently with many filling up on a weekly basis.  Diesel prices are also important since they affect the transportation and manufacturing costs of many goods across the economy. Fuel prices serve as a key economic indicator, and why the ongoing situation in the Middle East has become a growing concern for consumers and investors.

As the conflict enters its second month, with new headlines ranging from proposed peace agreements to possible escalation on a daily basis, oil prices continue to remain high with large intraday swings. At the time of this writing, Brent crude is trading above $110 per barrel and WTI above $100, meaning that higher energy prices can affect household budgets, inflation metrics, and Federal Reserve decisions.

The 1970s energy crisis is perhaps the most commonly cited historical example of how high oil prices can reshape consumer behavior and the broader economy for years. During that decade, two separate oil embargoes led to long lines at gas stations, rationing, and a shift in how Americans thought about energy consumption and security. 

Fortunately, today’s situation differs in important ways. The lasting impact from the 1970s and early 1980s included a wave of investment in domestic energy production and fuel efficiency measures that have reduced the sensitivity of the U.S. economy to oil spikes. The U.S. is now the world’s largest oil producer, inflation had been trending lower before this shock, and markets have historically adjusted and moved forward once the initial disruptions fade.

Gasoline prices have risen sharply

The national average for regular unleaded gasoline has recently climbed to around $4.00 per gallon, an increase of more than $1.00 per gallon in just a month.  The record high of $5.00 per gallon was reached in 2022.  For most households, filling up the car is a non-negotiable cost. Even with the adoption of electric vehicles, most cars on the road today still run on gasoline, meaning that higher prices at the pump affect nearly every household budget across the country.

If we suppose the average fill-up is 15 gallons, then the current increase adds $15 to each visit to the gas station. For those who fill up once a week, this amounts to roughly $780 less in their pockets per year.  The median American household earns just over $70,000 per year after taxes, according to the latest Census Bureau statistics, so this is roughly 1% of their after-tax income. While this leaves less money available for discretionary spending or savings, it can also likely be absorbed without causing significant financial difficulty. 

From an investment standpoint, higher energy costs for an extended time period have a negative impact on consumer spending, which is 68% of GDP.  The indirect cost of energy can also be meaningful. Gasoline and diesel fuel are basic inputs into nearly everything the economy produces. Transportation, manufacturing, agriculture, and distribution all depend on energy, which means that higher fuel costs raise the price of goods and services across the board. This is why oil price spikes do not simply affect energy bills but can ripple across the economy over time.

Gasoline prices are not just about oil

According to the U.S. Energy Information Agency, roughly half of the price at the pump reflects the cost of crude oil itself. The other half consists of refining costs, transportation and distribution to gas stations, sales and marketing expenses, and federal and state taxes. These costs are also why Americans in certain states pay considerably more than the national average for gasoline. The chart above illustrates how these components have shifted over time. 

There is not a one-to-one relationship between oil prices and gas prices at the pump. This is also because it takes time for higher market prices, which adjust quickly in the futures market, to affect what consumers experience. The chart also shows the annual change in the Consumer Price Index and the relationship with oil prices over time.

For investors and businesses, the oil futures market currently indicates that oil prices are much higher today than they are expected to be in the future.  A month ago, current and future prices were similar.  In other words, while today’s prices reflect the current Middle East supply disruption, traders are also signaling that they expect oil prices to eventually decline once conditions stabilize. This does not guarantee a quick resolution, but it does suggest that the market views the current spike as a one-time shock rather than a permanent shift to higher prices.

Higher energy prices complicate the inflation picture

Energy prices directly influence inflation, as these costs are components of the Consumer Price Index (CPI). Since 2022, lower energy prices have helped bring the CPI down. The recent jump in oil and gasoline prices, however, will likely push headline inflation higher in the coming months.  Direct energy costs represent only 6.3% of CPI as reported by the Bureau of Labor Statistics, however indirect fuel costs impact the price of other goods and services.  

Historically, higher inflation negatively affects both stocks and bonds and complicates the Federal Reserve’s decision-making. Investors have already shifted their expectations, with traders now assigning a greater probability to the Fed holding rates steady or even raising them rather than cutting. This reversal in expectations has introduced additional uncertainty for both equity and bond markets, especially as the Fed changes leadership in mid-May.

In summary, economists generally view these types of “supply-side” shocks as temporary. While challenging for consumers near-term, it is quite different from the 1970s. Specifically, the U.S. is the largest oil and natural gas producer, and the Fed has significantly more credibility in anchoring inflation expectations, making the current economic and financial market situation more stable than in the past. Despite the recent price spike, WTI crude oil at $100 per barrel remains below the average price over the past 25 years when adjusted for inflation. Maintaining a long-term perspective with a diversified portfolio has served clients well over time and especially in moments like this.