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Why falling gas prices aren't much to celebrate

September 30, 2011: 10:10 AM ET

Lower gas prices might feel great at the pump but they aren't the economic stimulus we were hoping for.

FORTUNE -- Much to the delight of U.S. consumers, prices at the gas pump have been steadily falling. Nationally, the average for a gallon of regular gasoline is $3.45, down from a high this year of $3.98 in mid-May, according to AAA.

But while households might save on gas, potentially leaving more money to spend on dinners out, movies and others things, this isn't exactly stimulus we've been hoping for. If anything, at least for the foreseeable future, it seems the further prices fall, the worse off that might make American consumers.

Here's why:

Bad news for the broader economy. While lower gas prices might put more cash in the pockets of consumers, they're likely still worried about being out of a job. Prices for oil, gasoline and other commodities have been falling on worries that the economy is headed for another recession. Europe's ongoing debt crisis has cast a shadow on what little good economic news there's been, prompting analysts to lower their expectations for future growth in the U.S. and the world at large. And when economies slow, demand for gasoline, diesel and jet fuel falls.

Crude oil futures are down 8.6% this month and 11% this year, according to Bloomberg. Prices have dropped 15% since the end of June – the biggest quarterly loss since the last three months of 2008 amid the height of the global financial crisis.

Clearly lower gas prices at the pump are far from signaling that better days are ahead.

Low gas prices, but not low enough. U.S. households spend a good chunk on fuel, averaging 4% of total U.S. consumption. The fall in gas prices would ordinarily free up some money to spend elsewhere, but the economic uncertainty is weighing on households, making them more likely to save it.

What's more, households have less to spend since implosion of the real estate market put America's wealth on a downward spiral. Though families have been working to improve their finances, household net worth declined this spring for the first time in a year, according to the Federal Reserve's Flow of Funds report earlier this month. It dropped 0.3% to $58.8 trillion in the April-June quarter from the previous period, after having risen three straight quarters.

And while gas might be cheaper, almost everything else is more expensive, which makes it much less likely that consumers will have much extra to spend on anything beyond necessities. Consumer prices rose 0.4% in August, driven largely by higher prices for energy, food, clothing and shelter.

Prices are still historically high. Despite the recent drop, gas prices remain historically high. Given higher costs for most things other than fuel, this surely dampens relief for consumers.

Gasoline prices nationwide today average $3.45 per gallon, higher than the $2.69 per gallon it was around this time last year, according to AAA. What's more, today's prices are higher than they were in 2009 when prices plunged to $2.48 amid the financial crisis.

Longer-term, the dip likely won't last. Even with weak demand for fuel in the U.S. and other developed economies in Europe, world energy consumption is expected to soar in the coming decades driven largely by growth in China and Indian and emerging economies in other parts of Asia and Latin America, according to the 2011 Energy Department's International Energy Outlook. Economists expect oil prices to rise to $125 a barrel by 2035.

Any relief at the pump today is likely to be temporary, and it won't do much to help stimulate the economy.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

Email | @ninhaitseng | RSS

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