U.S. gas prices have hit fresh record highs nearly every week over the past month as oil producers, affected by disruptions from the war in Ukraine, struggle to match rising demand from the summer travel season.
At the same time, airfare prices have spiked over 37% since January, setting up consumers for summer travel costs they’ve never seen before—and that was all before the latest bad news.
On Tuesday, the European Union finally included a partial ban on Russian oil in its sixth set of sanctions against the country. While the move has been applauded by many foreign policy experts, it will likely bring more energy price headaches for consumers worldwide.
EU officials said that 90% of Russian crude imports will be cut by the end of the year, but there will be an exemption for oil delivered from Russia via pipelines, which accounts for up to one-third of the bloc’s current purchases from the country.
News of the ban led Brent crude oil futures, the international benchmark, to jump 1.4% to $123.3 per barrel on Tuesday, with West Texas Intermediate crude rising 2.1% to $117.5 per barrel.
That’s bad news for travelers, but it could be even worse news for global economic growth if consumers are discouraged from spending altogether.
Shortages in Europe, more record highs in the U.S.
The head of the International Energy Agency, Fatih Birol, warned on Tuesday in an interview with the German outlet Der Spiegel that falling oil supplies will likely lead prices to remain elevated in the near term and could even cause shortages in Europe.
“When the main holiday season starts in Europe and the U.S., fuel demand will rise,” Birol said. “Then we could see shortages, for example, in diesel, petrol, or kerosene, particularly in Europe.”
Birol added that current energy price increases are “much bigger” than what was seen during the oil shocks of the 1970s—and they could last longer, too.
“Back then it was just about oil,” he said. “Now we have an oil crisis, a gas crisis, and an electricity crisis simultaneously.”
In the U.S., gas prices responded to the ban by notching yet another record high of $4.62 per gallon. That’s a more than 51% jump compared to the same period a year ago.
Don’t forget about China
China’s move to end its strict lockdown policy in Shanghai and Beijing is also adding to the global demand for oil.
Chinese officials said on Monday they will scrap the strictest lockdown measures in Shanghai by June 1 after two months of hardship for residents.
It’s a move that UBS Global Wealth Management’s CIO Mark Haefele said will cause “further upside” for oil prices ahead when coupled with supply-side restrictions from the EU’s ban on Russian imports.
In a Tuesday research note, Haefele added that “underinvestment in production” and a lack of alternative supply for oil should cause the critical commodity’s price to remain “higher for longer” as well.
Demand destruction and energy prices’ effects on inflation
As a result, consumers are facing one of the toughest summer travel seasons in history, and rising energy prices are already causing many to second-guess travel decisions for this summer as a phenomenon economists call demand destruction takes hold.
Demand destruction—or a sustained decline in the demand for a certain good amid persistently high prices—could exacerbate an economic growth slowdown that is already underway worldwide, especially in developing nations.
Forecasts for global GDP growth from investment banks and economists have been repeatedly cut since the start of the year, with the International Monetary Fund (IMF) saying in April that it expects global GDP will rise by just 3.6% in 2022, or nearly a percentage point less than its January estimates.
“From a historical perspective, [oil] prices are close to unsustainably high levels,” Alex Kuptsikevich, a senior market analyst at the online broker FxPro, told Fortune. “Already, high energy costs are causing a decline in retail consumption in Europe and the U.S., the world’s wealthiest regions. No doubt developing countries are experiencing an even more significant slowdown in their economies because of prevailing high fuel prices.”
Rising energy prices also darken the picture when it comes to inflation in the West. Although some investment banks and economists have argued that inflation in the U.S. should come down from its nearly four-decade highs in the coming months, elevated energy prices could challenge that prediction.
“Of course, the news suggests that the inflation situation in Europe, and in the West, could get worse before it gets better,” Ipek Ozkardeskaya told Fortune. “Even though we saw some easing in U.S. inflation figures earlier this month, the relentless positive pressure on oil prices is very much worrying across the Atlantic.”
If inflation remains elevated, demand destruction will only worsen. After all, more than half of Americans have said they plan to cut back on spending due to inflation in a May 23 Morgan Stanley survey.
Still, not every expert is predicting oil and gas prices will remain elevated over the long term.
“The longer-term prospects [of oil] remain an open question,” Kuptsikevich said. “The chances are now roughly equal that the oil market at levels near $120 remains at the foot of an extended multiyear rally or is ready to repeat the collapse of 2014 or 2008.”
Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.
