Implications of Rising Energy Costs: A Kleinman Center and Perry World House Q&A

In the weeks since the start of the war in Iran, energy prices have jumped significantly. Crude oil prices have jumped about 50 percent due to the war, the shutdown of the Strait of Hormuz, and other regional disruptions. These rising energy costs are trickling down to most people and are affecting everything from local development projects to food prices to global geopolitics. A group of experts affiliated with Perry World House and the Kleinman Center for Energy Policy shared their thoughts on how the current energy crisis and high prices will affect many parts of everyday life.

---

When Oil Spikes, Americans Pay

By Heather Boushey

As the war in Iran rattles global oil markets, gas prices are rising at a pace that echoes past geopolitical shocks. History shows that when energy prices surge, the effects ripple through inflation, food prices, and jobs at home.

As the President’s war wages on, energy prices are climbing and remain volatile, adding to inflationary pressure. Oil and energy—and all the sectors they power—are profoundly important to the economy, so policies that disrupt them quickly affect everyday life.

Gas price increases following U.S. attacks on Iran are already outpacing the Yemen War in 2025 and closely parallel the spikes after Russia’s invasion of Ukraine and the Libya conflict—only faster. Meanwhile, the Strait of Hormuz remains effectively closed. Roughly 20% of global oil flows through the strait, and tanker traffic has slowed dramatically, constraining supply.

Oil prices have surged accordingly. Brent crude is hovering around $110 per barrel, surpassing $120 at one point and compared to $72 per barrel just before the war started. The national average gas price has jumped over fifty cents since mid April and sits more than $1.30 higher than the national average this time last year. While the administration has framed these increases as temporary, past shocks suggest otherwise.

The 1973 oil crisis offers a clear warning: gas prices surged, inflation climbed, vehicle sales fell, and grocery costs rose sharply. While today’s economy differs, the pattern remains—oil shocks carry outsized economic consequences.

Those consequences are already visible at home. In Kansas, fertilizer supply disruptions threaten a keyagricultural sector. In California, rising gas prices strain millions who rely on cars and carry auto debt. In Texas, where freight and trucking dominate, soaring diesel prices put pressure on hundreds of thousands of jobs.

What begins as a global oil disruption quickly becomes a domestic affordability crisis. As the war unfolds, Americans are left paying the price—while relying on “concepts of a plan.”

---

High Oil Prices and the Affordability Crisis

By Sanya Carley

High oil prices mean that people pay more at the pump. In January of this year, a 15-gallon tank would have cost $44 not accounting for tax, when the average price of gasoline was $2.94 across the United States. At $4.52 per gallon, the average price of gasoline in early May, that same tank costs about $68 to fill, not including taxes. 

For households that rely on a personal vehicle for commuting, these additional costs—$24 per filled tank—can add up. And for households who are living on tight budgets, many of whom have to commute farther due to housing price constraints, these additional costs may force the adoption of risky coping strategies. For example, households may accrue debt on their credit cards or bills, or forgo expenditures on utilities (e.g., air conditioning as the weather turns warmer), food, or healthcare.

Higher oil prices do not just affect the price of gasoline. Oil prices have ripple effects all across the economy. When it costs more to fly or truck food, or any other commodity, these costs will eventually be passed along, at least in part, to consumers. Businesses will also absorb some of these costs, although small businesses across America are already struggling with high costs and the challenge of staying open.

In this moment in time, during high inflation and when nearly half the U.S. population already lacks the financial resources to cover their essential household needs, higher oil prices will add to the affordability crisis in potentially devastating ways.  

---

Energy Prices and the Costs for Development

By Stephen Hammer

The Santa Marta Fossil Fuel Transition conference that took place in late April in Colombia offered the tantalizing narrative that rising energy prices due to the war in Iran will hasten the shift towards clean energy systems and economies. Over the long term, that will likely be the case, but in the short term, climate projects are getting squeezed by the current energy and economic crisis, at both the national and local levels.

The energy-driven inflation that followed Russia’s 2022 invasion of Ukraine exacerbated the borrowing and spending that governments incurred to navigate the global COVID crisis. Both events reduced cash reserves and increased the amount governments are paying in debt service, delaying or crowding out other priorities.

The 2026 Iran war compounds the shock. The European Central Bank postponed its planned rate cuts on March 19 and raised its 2026 inflation forecast. Rising energy costs are hitting both government and household budgets in the form of rising gasoline, diesel, and food and consumer good costs. In Egypt and Jordan, tourism levels have declined precipitously, hitting local economies hard and reducing overall government tax receipts.

Given declines in development support globally, there are fewer concessional resources available to soften such blows. Even the cost of borrowing from development finance institutions—the traditional source of low-cost debt for many developing countries—has on average increased several hundred basis points since 2021, with the amount varying by bank.

Many municipalities count on transfers from central government to support major infrastructure projects, meaning national challenges affect their capacity to finance local priorities. Ninety percent of U.S. municipalities now cite rising project costs as their top obstacle to infrastructure delivery. Water systems, transit expansions, and resilience upgrades are getting deferred not because they stopped being good ideas, but because the financing math is currently broken.

---

Downstream Impacts of Rising Oil Prices

By Alison Knasin

We are in an age where geopolitics trickle down onto the household consumer in big ways. Higher oil prices are leading to higher prices per gallon of gas. These price increases are further straining households that might already be stretched thin—especially, when considering proposed reductions to federal programming such as the Supplemental Nutrition Assistance Program (SNAP) and the Low Income Home Energy Assistance Program (LIHEAP), that provide essential relief to households in need. 

Any increases to gas prices detract from available household funds that can be used for other purposes, such as paying for food, medicines, or bills, including rents or miscellaneous utilities (electric, gas, internet, etc.). Increased monetary pressure on households can lead to country-wide escalation in energy insecurity. In dire situations, not paying utility bills can lead to service disconnections, if households cannot afford their utility bills. Utility disconnections for nonpayment, and by proxy, energy insecurity, are highly linked to poor physical and mental health outcomes. Rising oil prices will have substantial downstream impacts on households and our country as a whole, especially in this moment when affordability is becoming a rampant issue. If these prices continue to rise, there will be severe impacts on households across the United States, but also worldwide. Households experiencing insecurity of any type (e.g., food, energy, housing) will have to make extremely difficult decisions about whether to pay to fill their gas tanks, or to use that money for other purposes. 

---

Oil Prices and Agriculture

By Thabo Lenneiye

When oil and gas prices spike, agriculture is impacted twice: first as a consumer of energy intensive-inputs, then as a producer through biofuel markets.

On the demand side, energy in the agriculture system is distributed across two segments. Upstream, many agriculture inputs such as nitrogen fertilizer, are a derivative of the fossil fuel and petrochemical sectors. Mid- and downstream, irrigation pumping, mechanization, post-harvest processing, and cold chain refrigeration, dominate the rest of agriculture’s direct and indirect energy use. 

It’s not surprising, therefore, that when oil and gas prices climb, food prices follow. During the 2022 fertilizer crisis, triggered by the Russia-Ukraine war’s pressure on natural gas and fertilizer supply chains, the global nitrogen-phosphorus-potassium basket averaged $815 per tonne in April 2022, compared with $327 per tonne in April 2024 (FAO, 2024). Currently, fertilizer prices are projected to rise by 31 percent in 2026, driven by a 60 percent jump in urea prices (World Bank 2026). This will lead to lower crop yields and broader food inflation, with the greatest harm falling on the most vulnerable communities and economies.  

On the supply side, biofuel policies have deepened energy-agriculture market linkages. When oil and gas prices rise, ethanol and renewable diesel become more profitable, pulling corn and soybean oil prices up alongside crude. Mandates like the U.S. Renewable Fuel Standard (RFS) reinforce the link; a fixed share of these crops must go to fuel regardless of price, so markets have less room to absorb shocks. Recent research finds corn and soybean oil price volatility rose roughly 29 percent and 19 percent, respectively, after the mandates took effect (Grimaldi Avileis, 2025). Farmers and grain buyers now face crude oil swings in ways they did not previously.

---

Rising Oil Prices: A View from China

By Scott Moore

China is as fearful of the destabilizing impacts of the ongoing conflict in the Persian Gulf as any other country. For China as elsewhere, the conflict has sharply increased energy and petrochemical feedstock costs, and severely weakened a country often viewed as friendly to Beijing. Just a few years ago, China enjoyed a landmark achievement in Middle East diplomacy by helping to broker a rapprochement between Iran and Saudi Arabia. But at the same time, the conflict bolsters China’s longstanding approach to energy security, which combines increasing supply from multiple sources, including renewables, maximizing storage, and reducing reliance on seaborne fuel imports in favor of overland routes, especially from Russia. This approach makes China far less vulnerable to an energy supply shock than it would have been otherwise. The geopolitical reverberations of the conflict remain in flux, but it seems that some Gulf countries are entertaining the idea of balancing their longstanding reliance on the United States for security with enhanced engagement with China. Tolls paid to Iran by ships transiting the Straits of Hormuz have reportedly been paid in Chinese yuan—a sign, though a tentative one, that China’s influence in the region may grow when the conflict ebbs. 

---

Energy Shocks, Coal Resilience, and the Case for Faster Decarbonization

By Angela Pachon

Oil shocks and high fuel prices can drive innovation that improves energy security and accelerates decarbonization. As seen in the decades following the 1970s oil crisis, many governments introduced energy-efficiency programs and supported the research, development, and commercialization of renewable energy technologies and biofuels. These policies improved energy security, reduced fossil fuel dependence, and lowered the energy and carbon intensity of economic growth.

A similar dynamic could emerge from the current energy shock, but mainly in the long term. High and volatile fossil fuel prices make decarbonization not only a climate objective, but also a strategy for energy security and affordability. However, given how inelastic energy demand is in the short term, many fuel-importing countries—especially in Asia—which are highly exposed to LNG supply pressures, have responded by increasing coal use. 

In the last month, India, South Korea, Indonesia, Thailand, the Philippines, and Vietnam have relied more heavily on coal fired power generation to protect electricity supply. Japan has removed restrictions to allow greater use of less efficient coal fired plants. At the household and small business level, higher LPG prices and supply disruptions have pushed some users in India back toward firewood, coal, charcoal, or other traditional fuels.

These responses may ease immediate shortages but are also costly and environmentally damaging. In 2022, during the energy supply disruption caused by sanctions on Russian oil and gas, coal prices reached unprecedented levels. This time, coal prices have also increased; although they remain below the extreme levels of 2022, they could rise further if disruptions in the Strait of Hormuz persist.

Today’s shock underlines the urgent need to accelerate the transition, particularly in low-income countries, where households and governments are most exposed and vulnerable to volatile fuel prices, fiscal constraints, energy insecurity, and the risk of worsening poverty.

---

How Are the Major Oil and Gas Companies Likely to React to the Current Crisis in the Gulf?

By Bob Scher

While there is no one way that all energy companies will respond to the current shocks to the global energy market, there are some trends we see emerging. Most major oil and gas companies seem to be looking at the current disruption in the transit of fuels from the Persian Gulf as temporary, and this view is supported in their eyes by what President Trump is saying about the war ending soon and how the Strait of Hormuz will reopen. As a result, few companies seem to be willing to make major new investments in production capacity elsewhere in the world and are content to take the profits from higher prices to reduce debt or conduct stock buy-backs. Producers in the Gulf itself have few options now but are almost assuredly looking at ways after hostilities end to invest in new infrastructure as a hedge to get hydrocarbons out the market without having to transit the Strait. If the disruption continues for longer, there may be increased incentives to increase production in other regions (e.g., Venezuela). However, the market hasn’t seen significant movement in that direction yet, and there is little chance that increased production can come anywhere near to replacing the twelve to fourteen million barrels of oil a day that is not coming through the Strait in the near or long term. Moreover, while companies may be happy with high prices temporarily, they are wary of prices staying higher for longer for fear that it will more fundamentally change the demand for oil or natural gas. 

---

Regional Dynamics in the Face of Rising Energy Prices

By Daniel Schneiderman

The UAE’s assertion that it would be withdrawing from the Organization of the Petroleum Exporting Countries (OPEC) is the latest in a series of evolving pain points tied to bilateral relations between the UAE and Saudi Arabia.

The UAE is the third largest producer in OPEC; losing it as a member will limit its ability to shape energy prices and supply. But the UAE’s desire to exert energy independence doesn’t tell the whole story of what’s happening between the two countries. 

Strategy and approach to regional tensions are much more at the heart of the breakdown in relations. Two principal examples of this tension manifested come to mind.  

First, Emirati support to the abortive attempted takeover of the country’s south by the Southern Transitional Council (STC)—Abu Dhabi’s preferred Yemeni partner—was damaging to already frayed unity amongst anti-Houthi forces inside Yemen and to the Saudi-backed Presidential Leadership Council (which is led by Riyadh’s favored leader Rashad al-Alimi). This incident laid plain the competition underway between the two to shape Yemen’s future. 

Sudan’s civil war is further straining bilateral ties.  Both sides are backing opposing forces in the conflict. The UAE is alleged to have provided the separatist Rapid Support Forces (RSF) with financial and material support; and the Saudis firmly behind the Sudanese Armed Forces. Saudi Arabia has publicly upbraided the “outside forces” it believes are responsible for endangering Sudan’s territorial integrity and stability—a thinly veiled shot at the UAE’s purported support to the RSF.  

The ties that bind the two countries are real and lasting around issues like trade and freedom of navigation through the Strait of Hormuz. While the war with Iran is papering over certain aspects of bilateral tensions, the UAE’s departure from OPEC is a further statement of intent from the UAE that it intends to assert an independent policy agenda, even when it puts them at odds with Saudi objectives. 

---

High Natural Gas, High Electricity Prices

By James Van Nostrand

When natural gas prices increase, the impact ripples through the electricity market. First, there is the direct impact on the cost to generate electricity, given that about 40 percent of the electricity supply in the United States is produced by natural gas-fired generating units. 

Generators will have to charge more for their output to cover the higher cost of the fuel input (natural gas). Second, there is the indirect effect, which has an even greater impact. About 70 percent of the electricity in the United States is produced in competitive wholesale markets where power is bought and sold through Regional Transmission Organizations (RTOs) or Independent System Operators (ISOs)—PJM in the mid-Atlantic region, ISO-NE in the Northeast, NYISO in New York, Mid-Continent ISO in the Midwest, and CAISO in California. In these markets, system operators dispatch the various electric generating units in the region based on their marginal costs of generation, with the bids arranged from lowest to highest cost, until the demand is satisfied, which is referred to as the “market-clearing price.” All generators producing power at the time receive this price, regardless of their marginal costs. In some competitive wholesale markets, natural-gas fired generation is the fuel at the margin over 90 percent of the time, thus setting the wholesale price for all electricity produced in that region. This wholesale price ultimately gets passed through to retail electric customers. As a result, increases in the price of natural gas can have an outsized impact on electricity prices throughout the United States.

---

Thinking Fast and Slow About Electricity: What the Strait of Hormuz Closure, AI Data Centers, and Heat Mean for Rising Electricity Bills

By Koko Warner

Since late February 2026, the effective closure of the Strait of Hormuz has sharply reduced oil and liquefied natural gas flows, with shipping transits collapsing by roughly 95 percent between February and March (UNCTAD 2026, 2–3). Because natural gas continues to set marginal electricity prices in many regions, fuel price shocks transmit rapidly into wholesale power markets. In Europe, early assessments point to gas prices rising by as much as 50 percent over the course of the year, creating immediate pressure on electricity affordability even where supply security is maintained (ECCO 2026, 3–4).

AI data centers add a second, distinct pressure. They represent a new category of electricity demand that is large, geographically concentrated, and operationally inflexible. Individual hyperscale facilities routinely draw hundreds of megawatts of continuous power, comparable to the electricity demand of a mid‑sized city, while clusters of facilities can rival the load of major metropolitan areas (International Energy Agency 2025, 14–15). These investments move from decision to grid connection in just a few years, far faster than traditional electricity planning cycles.

El Niño conditions are developing during 2026, increasing the likelihood of hotter‑than‑average and drier conditions across large regions (Carbon Brief 2026; NOAA Climate Prediction Center 2026). Higher temperatures raise electricity demand for cooling and intensify peak load precisely when systems are already managing new industrial demand and volatile fuel prices.

None of these forces implies immediate blackout risk. Modern grids are designed first to preserve physical reliability, and their initial response is curtailment, dispatch adjustments, and emergency procurement. Because reliability is protected, the first system failure appears earlier and more quietly, in the form of rising electricity bills that households can feel within one or two billing cycles.

This is where market design becomes central. Low‑cost electricity is not scarce, but it is often inaccessible when stress is highest. Solar and onshore wind are now among the lowest‑cost sources of new electricity generation in most regions, with levelized costs below those of new gas‑fired capacity even before fuel price spikes (International Energy Agency 2025, 80–84). Yet existing rules prevent these resources from responding flexibly to fast shocks.

In some cases, renewable generation is curtailed: electricity is produced but deliberately not used because of transmission congestion or operational rules that prioritize inflexible supply (Knasin et al. 2026, 368–369). In others, low‑cost projects remain unbuilt despite being technically and economically viable, because interconnection queues and permitting timelines stretch over many years, delaying access to supply that could ease price pressure (International Energy Agency 2025, 95–97). In still others, rooftop solar or small‑scale wind generates electricity behind the meter but is restricted from exporting power to the grid during periods of high demand, even when system prices are elevated.

Although these constraints differ, they produce the same outcome. Affordable electricity exists, yet rules prevent it from flowing to where and when it is most valuable. When fast shocks hit, electricity systems rely on the resources that are allowed to move quickly, often gas‑fired generation, emergency contracting, and accelerated network investment.

Households feel the consequences rapidly. Retail electricity bills include not only energy costs but also transmission, distribution, and other system charges, which together account for roughly half of what households pay in many jurisdictions (Knasin et al. 2026, 368–370). When large, concentrated loads and fuel shocks drive congestion or infrastructure spending, those costs are socialized across all customers. Individual households consume relatively little electricity, but they absorb system‑wide cost increases within one or two billing cycles.

The slow pace of energy policy change reflects electricity regulation built to manage essential infrastructure under conditions where reliability, safety, and equity justified caution. Planning horizons of five to ten years made sense in a slower world. The challenge today is how to accelerate specific functions without undermining system integrity. Shortening the time between approval and connection for technically sound projects, allowing behind‑the‑meter resources to export power during defined stress periods, and aligning cost responsibility more closely with large, fast‑growing loads can ease near‑term affordability pressure.

None of this requires redesigning electricity systems from scratch. It requires updating rules so that low‑cost power can respond on the same time scale as the shocks now shaping the system. When natural gas disruption, AI demand, and heat accelerate simultaneously, the cost appears first in household budgets. Affordability, not blackouts, is the early warning signal of stress.