Oil prices climbed Tuesday after the European Union moved to cut off Russian crude, raising the specter of even higher gasoline prices and intensifying economic reverberations for both consumers and the White House.
Brent crude, the global benchmark, swelled above $120 a barrel before pulling back after the E.U. levied its most significant economic penalty yet in response to Moscow's invasion of Ukraine. Meanwhile, the U.S. average for a gallon of gasoline hit a record $4.62 on Tuesday, AAA data shows; that's 52% higher than last year and an inflationary pressure point that can quickly choke consumer spending and flatten economic growth.
Drivers in seven states - including Illinois, Nevada and Oregon - are paying at least $5 for a gallon of gasoline on average, while Californians are shelling out more than $6. In every other state, the average is $4 or more.
"Gas prices historically weigh heavily on the consumer psyche and are often considered a bellwether of future inflationary pressures," said Jeffrey Roach, chief economist for LPL Financial. "Especially during this reopening moment with an expected surge in travel demand, gas prices will impact driving plans. And overall oil prices will eventually impact airline ticket prices."
The E.U. agreed Monday to curtail the use of Russian oil within months, an effort it said would cut roughly 90% of oil imports to the member nations. But the bloc made concessions to exempt pipeline deliveries, and several nations will get extensions or exemptions to the ban, according to E.U. officials and diplomats.
Pavel Molchanov, an analyst with the investment bank Raymond James, said that because the E.U. embargo targets only tanker deliveries, at least for now, the global market can adjust by rerouting seaborne shipments. So instead of shipping oil to European countries, he said, Russia will boost shipments to other markets, such as China, India and Turkey. In turn, those countries will buy less oil from the Middle East, whereas more oil from that region will go to Europe, he said.
"Ultimately, it will cancel out, or just about, in the sense of global supply," he said.
Still, Russian oil exports had fallen even before the embargo, partly because several major marine shipping companies had refused to transport the nation's cargo, including petroleum.
Crude prices that were hovering above $80 a barrel in January had moved above $120 by March, on fears the Russian conflict would curtail supply and lead to market disruptions. Prices at the gasoline pump soon followed, swelling nearly 20% roughly a week after the Feb. 24 invasion.
But even as oil prices began to ease in the weeks that followed, fuel prices remained elevated. This speaks to a phenomenon economists call "rockets and feathers." While a sudden jump in crude prices can propel gas prices up quickly, like a rocket, the same generally cannot be said when the momentum shifts. So when oil falls, gasoline prices tend to drift down slowly, like a feather.
Energy has been a main driver of inflation, as a rebound in demand from drivers, truckers and airlines has made it hard on suppliers to keep up. It's also top of mind for President Joe Biden, who reiterated Tuesday that combating rising costs is his top domestic priority. The president, who met with Federal Reserve Chair Jerome H. Powell earlier in the day, emphasized the central bank's independence to set monetary policy without White House interference.
The Fed has raised its benchmark interest rate twice this year in an attempt to tamp down inflation and is expected to do so five more times before 2022 is out. Officials have been trying to pace increases so as not to smother economic growth, a difficult balance to strike. If the economy cools too quickly, it could fall into a recession, generally defined as two consecutive quarters of negative economic growth.
Biden has also taken his message to the media's opinion pages. In an op-ed published in the Wall Street Journal on Tuesday, Biden wrote that the administration must mitigate the effects of higher gas prices, noting his actions to release global oil reserves and urging Congress to enact clean-energy tax credits and investments that he has proposed.
After spiking in March, gas prices cooled some in April but have been on a steady climb this month, setting records and leaving wallet-pressed drivers with the sense that there is no end in sight.
And summer travel has already begun. Nearly 35 million travelers took to the road for Memorial Day weekend, according to AAA forecasts, the highest number since before the pandemic, and despite record gas prices.
The desire to get out of the house and go on a trip after more than two years of interrupted travel is stronger than the desire to save money at the pump, said Jenni Newman, editor in chief of Cars.com.
But is there a price at which cost outweighs the urge to road trip?
"If pump prices keep rising, will people alter their summer travel plans? That remains to be seen," said Andrew Gross, a spokesman for AAA.
Following the E.U. announcement, prices for both the international and U.S. benchmarks for oil surged near their record highs for the year, though they pulled back later in the day. Brent crude was trading above $116 a barrel, while West Texas Intermediate crude, the U.S. benchmark, hovered above $115.
Meanwhile, the broader stock market began the trading week with mixed results, as investors grappled with the global economic sanctions and continue to wrestle with the ramifications of high inflation, rising interest rates and shifts in consumer spending.
The markets finished down slightly for the day. The S&P 500 fell by 26 points or 0.6% at the closing bell. The tech-heavy Nasdaq decreased by 50 points, or 0.4%, while the Dow Jones industrial average gave up more than 200 points, or 0.7%, to close the last trading day of the month.