How soaring gas prices are shaking up California’s massive economy

California Faces Economic Strain as Fuel Prices Surge Amid Middle East Conflict

Ivan Dorador, 38, completes a $60 gas fill-up at a Chevron station on Mission Road in Lincoln Heights, March 12, 2026. (Genaro Molina/Los Angeles Times)

With crude oil prices exceeding $100 per barrel and gasoline in California nearing $5.50 per gallon, drivers across the state are feeling the financial pinch every time they refuel.

As the conflict in Iran enters its third week, the resulting spike in energy prices is sending shockwaves through California’s massive economy, the fourth largest in the world.

Although experts say it’s too early to fully understand the long-term consequences, one thing is certain: higher fuel costs are reducing Californians’ discretionary spending, impacting both households and businesses already grappling with increased operational expenses.

Trevor Higgins, senior vice president for energy and environment at the Center for American Progress, noted, “Concerns about inflation and affordability are top of mind for Americans. The longer these elevated prices persist, the greater the risk of broader inflation.” The organization released a report this week outlining the inflationary effects of the current and previous conflicts.

On Thursday, California’s average gas price reached $5.37 per gallon—the highest in the country and up 82 cents from the previous month, according to AAA.

Economic Growth Meets Uncertainty

Prior to the outbreak of war, California’s economy was on track for robust growth, despite a sluggish job market and significant layoffs at major tech firms like Google, Block, and Autodesk.

The state’s economy expanded at an annualized rate of 3.8% in the last quarter, fueled by investments in artificial intelligence, a thriving aerospace sector, and other high-growth industries, as reported by the UCLA Anderson Forecast earlier this month.

While forecasts suggested job growth might pick up this year, ongoing instability in the Middle East has cast doubt on those predictions.

Industries Grapple with Rising Costs

California’s $4.1 trillion economy is diverse, with logistics, manufacturing, and agriculture among the sectors most affected by higher fuel prices. Defense contractors, however, may see increased demand due to the conflict.

More than 25 million registered drivers in California are feeling the impact at the pump, and the logistics sector—especially trucking—faces even steeper challenges as diesel prices climb.

Diesel averaged $6.21 per gallon on Thursday, up $1.17 from a month earlier.

The ports of Los Angeles and Long Beach serve as the backbone of Southern California’s logistics industry, supporting over 200,000 jobs and contributing $28 billion to the local economy in 2022. Around 9,000 truckers visit these ports weekly.

“Diesel is the lifeblood of supply chains, so truckers serving the ports will feel the effects immediately. This will disrupt many business plans,” said Jock O’Connell, an international trade advisor at Beacon Economics. He added, “Hopefully, the conflict will resolve soon, but for now, the entire U.S. transportation system is facing a ‘war tax.’”

Ronald Widdows, CEO of FlexiVan, explained that the cost of bunker fuel for ships has doubled, adding $2 million to each round trip—a cost ultimately passed on to U.S. importers and, eventually, consumers.

Shipping delays from the Middle East could also slow goods arriving in Southern California, though the immediate impact is expected to be minor, according to Widdows.

Agriculture and Other Sectors Under Pressure

California’s $61 billion agricultural industry, the largest in the nation, is particularly vulnerable to rising diesel prices.

“Agriculture relies heavily on diesel, whether it’s for almond harvesters or large tractors,” said Daniel Sumner, a professor of agriculture at UC Davis. He also warned that higher natural gas prices could drive up fertilizer costs, adding another layer of difficulty for farmers.

Sumner pointed out that these new challenges come as the industry is still dealing with the aftermath of tariffs from the Trump administration, which, despite being largely overturned by the Supreme Court, led to retaliatory measures from key trading partners.

Mixed Economic Signals

The Anderson report describes California’s economy as “bifurcated,” with tech and aerospace growth offsetting weaker performance in construction, retail, and hospitality. Job creation has lagged, exacerbated by thousands of layoffs in Silicon Valley, often attributed to the rise of artificial intelligence.

Hollywood has also seen significant job losses due to a slowdown in production, and the recent Paramount-Warner Bros. Discovery merger has heightened concerns about further layoffs.

Just last week, Block, the parent company of Cash App and Square, announced over 4,000 job cuts, citing AI as a factor.

Nationally, the Labor Department reported a loss of 92,000 jobs in February, contrary to expectations of a 60,000 gain, pushing the unemployment rate to 4.4%. California’s unemployment rate stood at 5.5% in December, the highest in the country, though slightly improved from the previous month.

Michael Bernick, former director of California’s Employment Development Department, remarked that while the war’s impact on employment hasn’t materialized yet, rising fuel costs and inflation are making the job market even tougher.

“California’s job market is among the most challenging I’ve seen in nearly five decades,” he said. “The state’s economy wasn’t in a strong position even before these new pressures.”

Defense Industry Stands to Gain

Despite the challenges, the defense sector—where California has a significant presence—could benefit from increased demand. While some major defense contractors have relocated their headquarters, companies like Boeing, Lockheed Martin, Northrop Grumman, and RTX (formerly Raytheon) still maintain large operations in the state.

Some defense stocks have risen since the conflict began, even as the broader S&P 500 index has declined, including a 1.5% drop on Thursday after threats from Iran’s new leadership.

Southern California has also experienced a revival in aerospace and defense technology, with startups like Anduril Industries—recently securing a $2.5 billion funding round—setting up headquarters in the region.

Chapman University economist Jim Doti believes that, despite inflation and higher fuel costs, California’s economy could see a net benefit from the war. “Missiles, which are among the most expensive elements of warfare, are largely produced in California. Historically, wars tend to have a positive macroeconomic effect,” he explained.

The university’s December forecast projected 2% growth in national GDP for the year, now revised to 2.2% due to an anticipated $100 billion in additional government spending.

However, economists remain divided on the overall impact of the war on state and national economies. Recent government data shows inflation rose 0.3% in February and 2.4% over the past year, exceeding the Federal Reserve’s 2% target. This reduces the likelihood of interest rate cuts and, combined with weak job growth, raises concerns about “stagflation”—a period of stagnant growth and rising prices.

Oxford Economics has maintained its forecast of 2.8% GDP growth for the U.S. this year.

The report also notes that while higher energy prices will erode disposable incomes, this may be partially offset by larger tax refunds resulting from last year’s tax-and-spending legislation.

O’Connell, the trade economist, commented that California’s defense industry will benefit “as we replenish our arsenal,” but emphasized that these gains are narrowly concentrated.

This article was adapted from an original story in the Los Angeles Times.