Experts say Americans will soon feel the brunt of the “oil tax” from the Middle East war that could lead to a pullback in consumer spending.
Since the conflict began disrupting shipping through the Strait of Hormuz, a key shipping corridor that carries one-fifth of the world’s oil, crude oil prices have soared, driving up fuel prices.
As higher fuel costs weigh on consumer budgets, companies and Wall Street strategists are warning that consumers, especially low-income Americans, may become more frugal.
“[A] a simple rule of thumb is that the price of oil is going up … $20 per barrel approx [a] A $150 billion tax on annual consumer spending,” Raymond James strategist Tavis McCourt said in a note to clients.
Read more: How the oil price shock feels in your wallet, from gas to groceries
The US national average gasoline price has already risen more than $0.60 since last month, and higher prices may become the new normal, as crude oil futures (CL=F) hover around $100 a barrel. Industry analysts estimate that every $10 increase in crude oil prices translates into an increase of about $0.25 per liter at the pump.
Uncertainty weighed on Americans’ views on the overall economy in early March, according to a University of Michigan consumer sentiment reading released Friday, which hit its lowest level so far this year.
“Anytime you have higher fuel prices, this will affect both supply and demand because the consumer will be cut back on their consumption,” Forrester Research retail analyst Sucharita Kodali told Yahoo Finance.
Economists say that while all consumers are likely to be affected by higher electricity prices, low-income consumers may have more difficulty affording higher costs due to affordability issues.
Continued high oil prices may begin to “increase the potential for a K-shaped curve in the economy,” or the divide between the incomes of low- and high-income households, Evercore ISI vice chairman Krishna Guha wrote in a client note.
Read more: What is a ‘K-shaped’ economy, and what causes the split?
The oil shock comes as the wage growth gap between low- and high-income families is at its widest in 10 years, according to the Bank of America Institute. In February, wages for top earners grew 4.2% year over year, while wages for low earners rose 0.6%.
Starting in 2026, economists hoped that the big tax refunds from President Trump’s One Big Beautiful Bill Act (OBBBA) could boost consumer spending and help close the gap between high and low earners.
That may no longer be the case. McCourt’s Raymond James believes that the $25 move in oil prices last week “actually eliminates the financial benefit” from OBBBA.
Bloomberg economists estimate that it will take oil prices around $83 per barrel to clear the recovery for households. As of Friday, Brent crude (BZ=F), the international benchmark, was trading at around $102 a barrel, while West Texas Intermediate crude (CL=F), the US benchmark, was trading at $97 a barrel.
Diesel prices also continue to rise, ultimately driving up the cost of transporting almost everything, as trucks carry 70% of US freight. That could push inflation further away from the Federal Reserve’s 2% target and eventually trigger a Fed reversal if the oil shock lasts more than six months.
S&P Global Market Intelligence director of economics Michael Zdinak said that the recovery from higher costs hitting things like food and clothing is usually “six to nine months.”
Earlier this week, Dollar General forecast cautious guidance that resulted in “the possibility of continued uncertainty, particularly in consumer behavior,” said CFO Donny Lau. The headwinds, he said, include “the changing nature of taxation” and “the possibility of higher electricity prices.”
Meanwhile, executives at grocery stores BJ’s ( BJ ) and Costco ( COST ) say higher prices on tap are leading shoppers to look for deals. AutoZone ( AZO ) CEO Philip Daniele noted at a retail conference that consumers may hold back on discretionary purchases, such as new cars, and instead invest in their current vehicles.
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Brooke DiPalma is a reporter for Yahoo Finance. Follow him on X at @BrookeDiPalma or send an email to bdipalma@yahoofinance.com.
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