Falling Gas Prices: Good News for Consumers, Bad News for the Economy?

Gas prices are the lowest since January, but could that be a bad sign for the economy?


Lawmakers are being urged to raise the 18.4 cent per gallon federal gasoline tax.

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This past week, Americans saw some of the lowest gasoline prices since January, with the national average falling below $3.40 per gallon, more than 50 cents off the April peak of $3.94. According to the Associated Press, the pullback should save consumers roughly $200 million a day.

Looks like that summer road trip is back on—everyone rejoice, right?

Not so fast. While lower gas prices mean Americans will be forking over less of their hard-earned cash at the gas station, they also say something not-so-pleasant about the global economy: It's slowing down.

How do experts know? Gas prices are largely determined by the super-volatile price of oil, which rises and falls according to a vast number of factors including supply, demand, political tumult, speculation, and economic forecasts.

[See a collection of political cartoons on gas prices.]

Earlier this year, turmoil in the Middle East stoked fears that the supply of oil could be sharply crimped, jacking up prices for consumers. This time around it's so-so forecasts about growth for the world's largest economies that are pushing prices down. With lower growth, oil analysts are predicting less demand, which means oil won't fetch as pretty a price.

Lately, crude oil prices have been trading in the $80 per barrel range after hitting a $109 per barrel earlier this year. When oil prices fall, it's usually an indication of weakening demand, which typically signals a slowing economy.

"Oil production is exceeding consumer demand because of sluggish economies," says Gregg Laskoski, senior oil analyst at GasBuddy.com. "That's one of the key reasons crude oil has been trading in a very narrow range below $80 a barrel."

Despite some encouraging news that parts of the U.S. economy might be finding some footing, projections for future growth are being pared back. Europe, too, faces a period of economic and political tumult as the euro zone sorts out how to rebuild the financial systems of some of its most vulnerable members.

[Read: U.S. Gasoline Prices Cheapest Since January.]

After being on a tear over the past several years, emerging markets such as China and India are slowing down a bit as well.

"Particularly since more than 50 percent of oil consumption today is occurring outside the U.S. in the emerging markets and they have been what's pulling overall global growth, any kind of impairment in that demand is reflective of slowing economies," says Mark Luschini, chief investment strategist at Janney Montgomery Scott. "That's a bit worrisome."

All of this amounts to less demand for oil even as supply of crude and refined petroleum products has ramped up in recent months. Going back to the old economics textbook: Lower demand coupled with increasing supply means lower prices.

While that means pressure on household budgets will ease, lower demand for oil and slowing growth predictions for the European, Chinese, and U.S. economies is bad news for financial systems already under a ton of stress.

[Read: Why Oil Prices Could Fall to Below $50 a Barrel.]

"We are all somewhat pleased to see prices going lower at the pump, but I'm not sure it's cause for celeberation," Laskoski says. "It's still an indication of much deeper problems in our economy."

One thing that could boost the economy and oil prices is clarity from policymakers on issues like the federal deficit and tax reform. The stock market and oil prices are manifestations of confidence, according to Luschini, and when they take a turn for the worse, companies pull pack on things like hiring and business investment, which further slows economic growth.

"If things begin to show some signs of improvement, if policymakers in Europe come out with some kind of solution that begins to address the concerns of sovereign [debt] crises, then increased confidence would lift prospects for global demand and put a floor under oil prices," Luschini says.

Meg Handley is a business reporter for U.S. News & World Report. You can reach her at mhandley@usnews.com and follow her on Twitter at @mmhandley.