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Monday, December 15, 2014

Why Is Cheap Gas Bad?

Prices at a few gas stations in the St. Louis area dipped below $2/gallon today as the price of crude oil has dropped 45% in the last six months to $56/barrel. I don't know why, but that's good for me and everyone else -- except, apparently for Wall Street, as the market averages dropped yet again today.

I don't understand why. I'd have thought that if we paid less for gasoline, we'd have more money to spend on everything else -- just in time for Christmas and Hanukkah. We've been told forever that if consumers have more money in their pockets, they'll put more of it into the cash registers of American businesses, which will then hire more people, who will then have more money to spend, and back around to the top of the cycle.

Moreover, with gas prices down, businesses don't have to pay as much to truck their goods around the country, which should mean lower prices for everything else on the shelves, too. And as we enter the winter vacation season, airlines should be able to take advantage of lower jet fuel prices to pass the savings along to passengers and fill more seats.

Plus, the Federal Reserve says that US manufacturing output last month was at its highest level since before the recession. Seems to me like at least some of the economic indicators look good. So why are low gas/oil prices a bad thing for Wall Street (and by extension, any of us who have retirement money invested in stocks and mutual funds)?

I can think of one negative. If gas prices stay this low, or go even lower, Americans won't have an incentive to move towards renewable energy (solar, wind) or buy more fuel-efficient vehicles. On the other hand, this may be the right time to increase the federal gas tax to save the Federal Highway Trust Fund, which is on the verge of going bust next year without Congress acting (laugh among yourselves) to raise enough money to rebuild our crumbling infrastructure.