Gas prices jump to their highest level since start of Iran war

The average cost of a gallon of gasoline hit $4.18 on Tuesday, according to AAA, the highest level since the war in the Middle East began.

Gasoline prices, which have risen by $1.20 a gallon since Feb. 28, climbed nearly 7 cents overnight, according to AAA.

The latest increase follows a brief period of relief, when prices eased after hitting a recent high of $4.17 on April 9 as the U.S. and Iran appeared to be making progress toward a deal to end the war. The countries agreed to a two-week ceasefire on April 8, which President Trump has since extended.

However, negotiations appear to have lost momentum in recent days, dashing hopes for a quick resolution to the war and sending oil prices higher.

Oil accounts for 51% of the cost of a gallon of gas, making it the biggest factor in determining prices at the pump. As of Tuesday morning, Brent, the international benchmark, was hovering around $111 a barrel, while West Texas Intermediate, the U.S. benchmark, was just below $100 a barrel.

“The Strait [of Hormuz] is not reopened — there’s no cohesive plan for reopening it — and now negotiations have been basically stopped,” said Patrick De Haan, a petroleum expert at GasBuddy. “So oil’s been slowly recapturing some of what it gave up after the ceasefire was announced.”

White House press secretary Karoline Leavitt told reporters on Monday that President Trump met with his national security team to discuss a proposal from Iran that would allow for the reopening of the Strait of Hormuz, but delay nuclear negotiations. However, Leavitt said she didn’t want to go so far as to say the administration was “considering” the Iranian proposal.

Residents in Michigan, Wisconsin, Illinois, and Indiana could see a particularly large increase at the pump, due to local refinery issues, such as a power outage at a Northwest Indiana facility, De Haan said. That, along with another snag at an Illinois plant, has pushed wholesale gas prices up by approximately 40 to 50 cents from their previous high on April 7, according to De Haan.

Rising gas prices deliver blow to U.S. consumers
Higher gas prices are perhaps the most visible financial blow U.S. consumers have experienced since the war started.

Over the last two months, Americans have spent $150 more on gas than they would have if it stayed below $3 a gallon, according to Neale Mahoney, an economics professor at Stanford University. By the end of the year, Mahoney predicts Americans will have spent roughly $800 more on gas than they would have if prices followed their pre-war trajectory.

That’s enough to swallow the fatter tax refunds Americans received this year as a result of the “One, Big, Beautiful Bill Act” passed last year. The average refund was up $333 compared to last year, according to the latest IRS data.

Even if the war ends and traffic resumes through the Strait of Hormuz, economists predict consumers will likely be stuck with elevated gas prices for the remainder of the year. Gas prices typically rise much faster after crude spikes than they recede when oil drops, a phenomenon known as the “rockets and feathers” principle. Getting damaged energy infrastructure back online could also pose a challenge.

“You can’t just turn on the supply of oil and gasoline like a switch,” Mahoney said.

Mahoney predicts gas prices will remain above $4 over the summer and then start to come down in the fall.

Threats to the economy
Higher gas prices could take a serious toll on the economy as customers rein in their spending, threatening overall GDP growth, experts have warned. About 70 cents of every $1 of GDP stems from consumer spending.

Customers haven’t pulled back yet on trips to the pump, mainly because they can’t this time of year, according to De Haan.

“There’s not really much opportunity for people right now to cut back,”  he said. “People aren’t on vacation, kids are in school, people are doing their nine-to-five grind.”

However, as Americans begin to spend more on gas, that could reduce their spending in other areas, Mahoney noted. Higher diesel prices also threaten to increase the cost of food and other consumer goods as transportation costs grow. As of Tuesday, diesel was $5.46 a gallon, up $1.70 since the war began, according to AAA.

“The impact of higher energy costs is most immediately felt and seen at the pump, but they raise costs more broadly,” Mahoney said. “You’ll see airfares going up if you’re searching for a summer vacation, and we see it in grocery prices,” he added.