Rising Oil Prices Threaten to Erase Tax Cut Benefits, Undermining Key Economic Achievement

Gas prices are displayed at a Shell station in Azusa, California.
Robert Gauthier | Los Angeles Times | Getty Images

The escalating cost of oil presents a dual threat to President Donald Trump’s economic agenda, potentially not only hindering his administration’s efforts to combat inflation but also significantly diminishing the impact of his signature legislative achievement: the tax cuts. Analysts suggest that the economic benefits derived from reduced tax withholdings and anticipated tax refunds, collectively known as the "big beautiful bill," could be largely negated if oil prices remain elevated by more than $20 per barrel above pre-war levels.

According to Tavis McCourt, a strategist at Raymond James, the recent surge in oil prices, which saw a $25 increase in the past week, has effectively offset the fiscal stimulus intended by the "One Big Beautiful Bill Act." McCourt’s analysis, detailed in a recent note, extrapolates the impact of oil price hikes by applying them to the substantial consumer expenditure on gasoline. In the fourth quarter of 2025, consumers spent over $420 billion on gasoline. McCourt’s calculations, which account for both potential reductions in demand due to higher prices and the necessity for companies to maintain profit margins, indicate that a $20 increase in oil prices could translate to an additional $150 billion in consumer spending at the pump. This figure closely rivals the estimated $129 billion in individual tax cuts for 2025 projected by the Tax Foundation, the majority of which is expected to be distributed through tax refunds during the current filing season.

The price of U.S. oil before the recent escalation, specifically on February 27, closed at $67.02 per barrel. As of Tuesday morning, following significant price volatility the previous day, oil prices are still trading more than $20 higher, at $88.20 per barrel.

Stephanie Roth, chief economist at Wolfe Research, echoed similar concerns, suggesting that her estimations of the financial strain on consumers from elevated oil prices align with her projections for increased spending fueled by the tax law. However, Wolfe Research’s Tuesday note indicates that oil prices would need to sustain levels above $100 per barrel for an extended period to realize such an impact. Roth emphasized that the current impact on gas prices has been relatively short-lived and modest compared to the potential long-term consequences.

The duration of elevated oil prices remains a critical factor. While President Trump stated in an interview with a CBS News reporter on Monday that the conflict was "very complete," he did not provide a timeline for its conclusion during a press conference that same day. McCourt noted historical precedents, such as the Gulf War in 1990 and the Russian invasion of Ukraine in 2022, where it took approximately six months for oil prices to revert to pre-conflict levels.

Consequences of Weaker Stimulus

The fiscal stimulus anticipated from the tax law was expected to provide a significant boost to the economy in 2026, with some economists predicting a reacceleration of U.S. growth, partly attributed to the legislation. However, the current oil price shock coincides with the period when consumers are set to receive their tax refunds. Citadel Securities estimated last week that as of March 1, only 30% of refunds had been distributed, with a projected increase to around 75% by May 1.

Gabriel Shahin, CEO of Falcon Wealth Planning, articulated this concern in an email to CNBC, stating, "The bottom line is that if we were expecting those tax refunds to lift consumer spending, these higher oil prices are just redirecting all that cash toward energy costs. It’s essentially voiding out the economic boost we were set to see."

Conversely, Dan Niles, portfolio manager at Niles Investment Management, offered a different perspective, suggesting that the tax refunds might help the economy absorb the higher oil prices. He drew parallels to 2022 and 2023 when oil prices reached similar levels, while many on Wall Street anticipated a recession due to rising interest rates. Niles argued that if the economy weathered that period, characterized by surging inflation in 2021 and elevated oil prices, without succumbing to a recession, it is unlikely that current inflation at 3% and oil prices around $100 would trigger a recession.

Many analysts on Wall Street have noted similarities between the current price surge and the events of four years ago, coinciding with Russia’s invasion of Ukraine. However, Roth cautioned against overreliance on this comparison. She pointed out significant differences in the economic backdrop, noting that core inflation was running at 5.5% then, compared to 3% today, and job growth was around 500,000, whereas it has averaged about 37,000 over the past couple of months. This, she concluded, indicates an entirely different economic landscape.

McCourt believes that if the stimulus from the tax bill proves less impactful than initially projected, it is unlikely to drastically alter most economic outlooks for the year, particularly concerning stocks, which he argues never fully priced in a significant surge in consumer spending. He observed that consumer discretionary stocks have underperformed the S&P 500 in 2026.

However, McCourt also suggested that the economy, and not solely the stock market, could withstand higher oil prices and weaker-than-expected stimulus, provided the labor market remains robust. He stated, "We just have never had a sustained pullback in consumer spending without substantial job losses. We’ll have some shifts in spending … But it’s probably not going to impact the overall consumer spending levels."