For most Americans, the price of gasoline at the pump is one of the most direct ways the conflict in Iran touches their daily lives. Gas prices are easy to see and change often, and filling up the tank at least once a week is a must for getting to work, school, and the grocery store. Diesel prices matter just as much because they affect the cost of shipping and making goods throughout the economy. That is why these prices are watched closely as signs of economic health, and why the ongoing situation in the Middle East has become a growing concern for everyday consumers and investors alike.
Now in its second month, the conflict continues to generate daily headlines — ranging from possible peace deals to fears of further escalation — keeping oil prices elevated and causing large swings within single trading days. Brent crude (a widely used global oil price benchmark) is now trading above $110 per barrel, and WTI (the U.S. benchmark) is above $100. These higher energy prices are expected to affect household budgets, overall price levels, and decisions made by the Federal Reserve (the U.S. central bank that manages interest rates).
The energy crisis of the 1970s is probably the most well-known historical example of how high oil prices can change consumer behavior and the broader economy for years. During that decade, two separate oil supply disruptions led to long lines at gas stations, fuel rationing, and a new national focus on energy use and security.
Fortunately, today's situation is different in meaningful ways. The long-term effects of the 1970s and early 1980s included major investments in domestic energy production and fuel efficiency that have made the U.S. economy less sensitive to oil price spikes. The U.S. is now the world's largest oil producer, inflation had been moving lower before this shock, and markets have historically recovered once initial disruptions pass. While consumers may continue to face some challenges, keeping a long-term perspective and staying patient remain essential for investors.
Gasoline prices have risen sharply
The national average price for regular unleaded gasoline has risen to around $4.00 per gallon — an increase of more than a dollar per gallon in just one month. While this is still below the record high of $5.00 per gallon reached in 2022, prices could climb further if oil stays expensive. For most households, buying gas is not optional. Even if people try to drive a little less, higher gas prices will directly cut into what families can spend on other things or save. And since most vehicles on the road today still run on gasoline — even with the growing popularity of electric vehicles — higher prices at the pump affect nearly every household in the country.
The impact of higher gasoline prices on consumers is both direct and indirect. A simple back-of-the-envelope calculation shows how this affects everyday consumer spending depending on income. 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.
At the federal minimum wage of $7.25 per hour, that would represent more than two additional hours of work just to stay financially afloat. The story is different for those at higher income ranges. The median American household earns just over $70,000 per year after taxes, according to the latest Census Bureau statistics, so this is above 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.
In short, higher gasoline prices act like a direct cost increase on consumers. Without downplaying the difficulties some households may face, it is also clear that most families will be able to manage through this period.
From an investing standpoint, the drag on the economy can add up. When you multiply the extra spending across millions of households filling up week after week, the combined effect on consumer spending and saving rates can become significant if oil prices stay high for a long time. But the indirect effects may matter even more. Gasoline and diesel are key inputs for nearly everything the economy produces. Transportation, manufacturing, farming, and distribution all depend on fuel, meaning higher energy costs raise prices for goods and services across the board. This is why oil price increases do not just affect your energy bill — they can ripple throughout the entire economy over time.
Gasoline prices are not just about oil
Understanding what drives gasoline prices can help put the current situation in perspective. 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 accompanying chart, based on the latest available data which does not yet show the latest jump in prices, illustrates how these components have shifted over time.
This relationship is partly why there is not a one-to-one relationship between oil prices and gas prices at the pump. It also takes time for higher market prices — which adjust quickly in the futures market (where buyers and sellers agree on prices for future delivery) — to show up in what consumers pay. The chart also shows the annual change in the overall Consumer Price Index (a common measure of inflation) and its clear connection to oil prices over time.
For investors, it is also worth noting that the oil futures curve is deeply "backwardated" at the moment. This means that oil prices are much higher today than they are expected to be in the future — a significant shift from just a month ago when prices were expected to stay relatively flat over time. In other words, while today's prices reflect the current supply disruption in the Middle East, traders are signaling that they expect oil prices to eventually fall once conditions stabilize. This does not guarantee a quick resolution and can change as new information becomes available, but it does suggest that markets view the current spike as a temporary shock rather than a permanent new level for prices.
Higher energy prices complicate the inflation picture
For investors, energy prices will push up headline inflation — meaning the broad measure of rising prices that includes energy costs. After several years of improving energy-related inflation readings, the recent jump in oil and gasoline prices will almost certainly push headline inflation higher in the coming months. Organizations such as the OECD now estimate that U.S. inflation could rise faster than expected this year.
This matters for several reasons. First, consumers are still recovering from the surge in prices that followed the pandemic. Second, both stocks and bonds have historically struggled when inflation rises unexpectedly, as it increases costs for companies and reduces the purchasing power of fixed payments from bonds. That said, markets have shown considerable resilience over the past several years even in difficult inflationary environments.
Third, and perhaps most immediately relevant for financial markets, rising inflation makes the Federal Reserve's decisions more difficult. Markets have already shifted their expectations, with traders now assigning a greater probability to the Fed holding interest rates steady or even raising them rather than cutting. This change in expectations has introduced additional uncertainty for both stock and bond markets, especially as the Fed goes through a leadership transition in mid-May.
Economists generally view these types of "supply-side" shocks — where prices rise because of a disruption in supply rather than excess demand — as temporary. This is not a prediction that high oil prices will be short-lived, but rather reflects the idea that prices tend to ease once supply returns to normal levels.
While the situation is still challenging for consumers, 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. For investors, this means that the best approach continues to be staying invested with a well-constructed portfolio and financial plan. This served investors well during the last inflation spike in 2022, and is still likely the best way to achieve financial goals.
The bottom line? Rising gasoline prices are a burden for consumers and will likely drive headline inflation higher. However, history shows that markets and the economy have navigated past energy shocks. Investors should maintain a long-term perspective, avoid overreacting to daily headlines, and stay focused on their financial plans.