Gasoline at Four-Year Highs as Iran Crisis and Refinery Outages Collide

US gasoline prices reached $4.16 per gallon in early April 2026—the highest level since August 2022—driven by a rare convergence of geopolitical supply shocks and domestic refinery failures that is reshaping Federal Reserve inflation calculations and compressing discretionary spending for millions of households.

The surge reflects twin pressures: Iran’s blockade of the Strait of Hormuz, which has choked off roughly 20% of global oil supplies since late February, and the catastrophic explosion at Valero’s Port Arthur refinery in early April, which removed 3.7% of Gulf Coast refining capacity during the industry’s seasonal maintenance window. Spot gasoline prices hit $3.51 per gallon on April 28, up 71% year-over-year, per Trading Economics.

The Strait of Hormuz Choke

The Iran Conflict, which escalated on February 28 with US-Israeli airstrikes, effectively closed the Strait of Hormuz—a waterway that carried 20 million barrels per day before hostilities began. By mid-April, competing US and Iranian blockades had reduced shipping through the strait to just 3.8 million barrels per day, per Euronews. The International Energy Agency warned the closure disrupted 10.1 million barrels per day of supply in March alone.

Brent crude peaked at $130 per barrel in April, while West Texas Intermediate surged 49% to $99.64 since the conflict’s onset. The physical market stress prompted unusually blunt warnings from oil executives. “You just can’t take 8 to 10 million barrels a day of oil and 20 or so percent of the liquefied natural gas market off the world stage without having some significant repercussions,” ConocoPhillips CEO Ryan Lance said at CERAWeek, according to CNBC.

Domestic Refining Capacity Hits a Wall

While crude prices spiked, US refining capacity took a simultaneous hit. Valero’s Port Arthur facility—one of the largest refineries on the Gulf Coast—suffered an explosion and fire in early April that destroyed its diesel hydrotreater and control room, forcing an extended shutdown. The outage coincided with seasonal spring maintenance across Gulf Coast refineries, amplifying supply constraints just as summer driving season approached.

The dual supply shock is visible in March inflation data. Consumer Price Index figures released April 10 showed headline inflation spiked 0.9% month-over-month—the largest single-month jump since June 2022—with gasoline surging 21.2% and accounting for nearly three-quarters of the increase, data from the Bureau of Labor Statistics showed. Annual CPI reached 3.3%, up from 2.4% in February.

The Fed’s Inflation Calculus Shifts

The gasoline surge has forced the Federal Reserve to recalibrate. At its March 18 meeting, the central bank raised its 2026 inflation forecast from 2.4% to 2.7%—the largest single-year upward revision in recent cycles, per Yahoo Finance. Seven of 19 Federal Open Market Committee participants now project zero rate cuts in 2026, up from prior expectations of one to three cuts.

Research from the Federal Reserve Bank of Dallas models the inflation impact of extended Strait closures. A one-to-three-quarter disruption would add 0.35 to 1.47 percentage points to fourth-quarter 2026 headline PCE inflation, and 0.18 to 0.49 points to core PCE. The Energy Information Administration projects gasoline will not fall below $3 per gallon before the end of 2027.

Lower-Income Households Face Consumption Cliff

The inflationary shock hits unevenly. Households in the lowest income quintile now spend four times as much on gasoline as a share of after-tax income compared to the top quintile, per Goldman Sachs analysis. The median lower-income household spent 4.2% of income on gasoline in March 2026—up from 3.9% a year earlier and above pre-pandemic 2019 levels, according to Bank of America.

Goldman estimates the price increases create an annualised headwind of roughly $140 billion for household incomes at current levels. The firm forecasts weak consumption growth in coming months, projecting a 1% decline in headline retail sales due to gasoline-driven purchasing power compression. Consumer sentiment hit a record low of 47.6 in April—the weakest reading in over 70 years of University of Michigan data.

Moody’s Analytics framed the dynamic as a hidden tax. “Higher gasoline and utility costs act like a tax on households by reducing real disposable income,” the firm’s analysts wrote, per Fortune. “As consumers spend more on essential goods and services, they will curb spending elsewhere.”

What to Watch

The April 7-8 ceasefire announcement and the Strait’s formal reopening on April 17 introduce uncertainty into forward inflation projections. If shipping volumes recover faster than the Dallas Fed’s three-quarter closure scenario assumed, headline PCE could moderate more quickly in the second half of 2026. The operational status of Valero’s Port Arthur refinery remains unclear—restart timelines will determine whether Gulf Coast refining capacity returns before peak summer demand.

For the Fed, the central question is whether gasoline-driven inflation represents a temporary shock or a persistent input cost that feeds into broader price-setting. March’s 0.9% monthly CPI jump was dominated by energy, but wage pressures and housing costs remain elevated. If lower-income spending compression triggers demand destruction visible in retail sales data, the Fed may gain room to cut rates later in 2026—but only if inflation expectations remain anchored. The next CPI release, covering April, will show whether the worst of the gasoline shock has passed or is still building.