Unleaded gas, which reached a record $4.33 per gallon in the U.S. on Friday, could pass $5 across a large part of the country over the next six months, causing particular pain to low-income households and rural residents who may be forced to cut back on spending. 

“Unfortunately, I see prices going higher from here,” Scott Shelton, an energy specialist at the commodity and currency investment inter-dealer broker ICAP, told Fortune. “We could see a national average of between $5 to $6 per gallon all summer long, with diesel prices even higher.” 

If sky-high gas prices do persist, it could have a significant impact on the U.S. economy, leading to falling consumer demand for all sorts of products as people tighten their belts to offset the higher cost of daily commutes.

The potential impact is so great that some experts are forecasting a greater likelihood of recession and stagflation. Goldman Sachs analysts now see a 35% risk of recession in 2022, up from just 10% a year ago. Meanwhile, former European Central Bank official Otmar Issing warned in an interview with Bloomberg last week that stagflation is “the biggest risk” facing the global economy. Even U.S. Labor Secretary Marty Walsh recently said that a recession is now “a real likelihood” as gas prices surge. 

Why are gas prices sky-high?

Rising gas prices are mainly a result of severe sanctions by the U.S and its allies that have effectively taken Russian oil off the market. The move has led to the sixth-largest disruption in oil supply since World War II, according to strategists at Goldman Sachs Research. 

While the U.S. purchased only 3.3% of its crude from Russia in 2021 and around 7% of its total petroleum products in 2020, oil is ultimately priced by the highly interconnected global commodities market. That means rising oil prices are reflected at the pump worldwide, not just in countries that import Russian energy.

Russia was the world’s largest oil product exporter in 2021, according to the International Energy Agency, pumping out roughly 5 million barrels of crude each day.

The loss of this supply sent Brent Crude prices, the international benchmark, to near $140 per barrel in early March, a level not seen since 2008. While oil prices have since retreated to around $105, consumers may not experience immediate relief as experts expect prices at the pump to remain elevated throughout the summer.

From bad to worse 

Replacing Russian oil won’t be easy, and current attempts have struggled to fill the void.

“For the short term, the question is if these barrels can be replaced or not. Now, there are attempts to replace them, but I believe so far these attempts have been unsuccessful,” analyst Tamas Varga of the independent commodity broker, PVM Oil Associates, told Fortune. 

If Russia cuts off natural gas exports to Europe, Varga said that oil prices could surpass the record high of $147.27 set in July 2008 due to Europe switching to using more oil to avoid high natural gas prices..

Rebecca Babin, a senior equity trader for CIBC Private Wealth Management, US, said the busy summer driving season also factors into the problem. 

“We’re not really building the gasoline stockpiles that we would typically see in the shoulder season to prepare us to have a lot of supplies in place for summer,” Babin told Fortune. “That means that when summer comes and people start driving more, we’re going to have a harder time meeting that demand and prices will go up.” 

In a note to clients last Thursday, Goldman Sachs analysts echoed Babin’s comments, saying they now expect oil prices of  $115 to $175 per barrel in 2022.

Not all experts predict prices will continue to rise, however. Jay Hatfield, founder, CEO, and portfolio manager of investment management firm Infrastructure Capital Partners, said in an interview that he believes we are “close to peak pricing” in oil. 

Hatfield said that U.S. gas prices could rise another 50 to 60 cents per gallon over the next six months if the war continues, but he believes increasing U.S. oil production and falling demand for gasoline due will help keep $5 per gallon gas at bay.

Demand destruction

When gas prices exceed $5 per gallon, the economy tends to experience what’s called demand destruction, whereby consumers and businesses reduce spending because of the higher prices. 

The San Francisco Federal Reserve described the phenomenon in a 2007 report, saying: “When gasoline prices increase, a larger share of households’ budgets is likely to be spent on it, which leaves less to spend on other goods and services. The same goes for businesses whose goods must be shipped from place to place or that use fuel as a major input.”

ConocoPhillips CEO Ryan Lance said in an interview with Bloomberg last week that his firm is increasing production to help prevent any broader U.S. economic problems. He expects that overall U.S. output will grow by 800,000 to 900,000 barrels daily in 2022 alone.

“So the market and the industry are responding, but you just can’t turn on a dime,” Lance said. When gas prices nudge above $5 per gallon, “you’re starting to encroach upon that area where demand destruction will start to occur.”

Low-income consumers will end up being hurt the most by higher gas prices.

“For one, gas makes up a larger share of their total spending. For another, lower-income consumers tend to work in sectors where remote working is not an option (e.g. leisure and hospitality), and so their driving demand is inelastic to gas prices,” Bank of America analysts wrote in a note to clients last week.

A recession, stagflation, or both?

Studies have shown that the U.S. economy reacts asymmetrically to oil price fluctuations. In other words, rising oil prices reduce economic activity more than falling prices stimulate it. This asymmetry may lead to a recession, some experts believe.

James Hamilton, an economics professor at University of California, San Diego, has detailed how large oil price increases associated with events like the 1973-74 Arab oil embargo, the Iranian Revolution in 1978, and the First Persian Gulf War in 1990 were each followed by a global recession.

Hamilton even argued that high oil prices from 2007 to 2008 were a major contributor to the Great Recession. 

Billionaire investor and DoubleLine Capital CEO Jeff Gundlach recently warned that rising oil and gas prices could lead to consumers spending less on everyday products and lead to dire consequences for the U.S. economy. Recession and even stagflation, an economic phenomenon that couples low growth and high inflation, are possibilities.

“Historically, oil shocks have led to demand destruction that causes recessions. We’re going to start hearing the word stagflation a lot more,” Gundlach said in a recent interview with Magnifi Media.