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Key Takeaways
- Gas prices have risen about 11% over the past week, as the surge in oil prices sparked by the escalating conflict in the Middle East quickly feeds through to the costs that consumers face at the pump.
- An extended conflict that disrupts the global supply of oil could continue to push fuel prices higher, which would have an impact on overall inflation levels and weigh on economic activity.
Drivers will likely experience more pain at the pump after a big jump in gas prices this week sparked by developments in the Middle East.
The average cost of a gallon of regular gasoline, according to AAA, stands at $3.32, about 11% higher than a week ago, just before the U.S. and Israel launched attacks on Iran that have led to a broader armed conflict in the region. The rise in fuel prices follow a massive jump in oil prices amid concerns that supplies from the resource-rich region could be disrupted
“Gasoline prices are going to keep going up in the U.S.,” said Ryan Sweet, chief global economist at Oxford Economics, at a press event this week. “Wholesale gasoline prices, which lead retail by two weeks, signal that we’re going to see higher prices, you and I will see higher prices, at the pump in the U.S. over the next couple of weeks.”
Why This Matters
Even small increases at the pump can ripple through the economy by squeezing household budgets and reducing consumer spending, a key driver of U.S. growth. Sustained energy price increases can lift inflation, influence Federal Reserve interest-rate decisions, and shift market performance across sectors from airlines and retailers to oil producers.
There’s Much More Room for Gas Prices to Rise
The war in the Middle East has expanded in recent days, fueling concerns that it could last longer than some initially anticipated. President Donald Trump said earlier this week the conflict was expected last four to five weeks, though he opened up the possibility that it could last far longer. On Friday, he said only “unconditional surrender” from Iran will end the war.
A prolonged conflict would continue to feed through to the prices consumers pay to fill up the tank.
“It all depends on if there’s further escalation and oil prices rise from this point forward,” Sweet said.“ Gasoline prices adjust very, very quickly.”
For every $10 increase in crude oil prices, expect to see around a 25 cent increase in pump prices, Sweet said.
West Texas Intermediate futures, the U.S. crude oil benchmark, have risen more than $30 over the past week to around $90 per barrel as of Friday afternoon, trading at their highest levels since 2023.
Oil Shock is ‘A Real Thing’ for US Economy
Further increases in fuel costs would add to inflationary pressures and consumer spending, taking a toll on the U.S. economy.
“The oil price shock, depending on how long it lasts, is a real thing. Consumers will feel that,” Mary Daly, president of the Federal Reserve Bank of San Francisco, said on CNBC on Friday.
“That can be challenging for firms because they need to find workarounds, but it also can cause consumers to pull back on other spending,” Daly said, adding that “consumer spending has been a strength of the economy.”
A sustained rise in fuel costs could also keep the Fed from cutting interest rates again anytime soon, as inflation remains above the central bank’s target rate.
Sweet said that every penny increase in gasoline spending reduces overall consumer spending by $1.5 billion over the course of the year. “Economic costs can increase quite noticeably and quickly, because of retail gasoline prices.”
