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The downside of cheaper gas

November 12, 2013: 9:53 AM ET

We're driving less, and that may not necessarily be a good sign for the economy.

131111172117-gas-prices-620xaFORTUNE -- U.S. gas prices are declining, falling below $3 a gallon across a handful of states. Not surprisingly, most are taking the drop as goods news, since less money spent at the pump leaves more money to spend elsewhere. That's one way to look at it, but often when gas prices drop steadily, that also reflects weaknesses in the economy.

Recall the wake of the financial crisis. The global economy was in for a deep downturn, which cut demand for oil. In November 2008, gas fell below $1.87 a gallon from just above $4 a gallon four months earlier. The Great Recession is clearly behind us, but the residual effects have lingered, dragging down gas prices with it.

On average, the price of a gallon of gas currently stands at $3.91 nationwide, according to AAA. Six states have seen prices fall below the $3 mark, and with prices expected to fall further, several other states could enjoy similar savings. (Click here to find out what it costs in your state.) The drop is partly due to a relatively quiet hurricane season, which has kept refineries operating without disruptions. And with a U.S. military strike in Syria less likely, global oil markets have calmed.

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While that's all great, it may be overly optimistic to cheer cheaper gas.

As Barry Ritholtz of Bloomberg warns, prices have also fallen because drivers are demanding less fuel. It's one of many signs that consumers are still feeling the effects of the recession more than three years after its official end. Total miles driven have not recovered from their November 2007 peak. That figure is down nearly 3% from more than 5 trillion vehicle miles driven annually, as high unemployment has translated to fewer people driving to work. What's more, the bust of the housing market has meant fewer extra-long commutes from the exurbs and back.

All this makes sense, but more broadly, it's also worth mentioning that less demand for gas could be more permanent than we think, as Americans had been driving less even before the economic downturn.

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Driving in the U.S. peaked in 2004 and has been declining since, according to a study by the University of Michigan Transportation Institute. In 2011, the most recent data available, the average licensed driver racked up 12,492 miles, down by 8.9% or 1,221 miles from the peak seven years ago. The study attributes various reasons for the decline, including more people working at home and attending meetings via new technologies, an aging population, more usage of public transportation, and more young people delaying getting a driver's license.

On top of that, industry watchers have said demand for gas could drop in the coming years thanks partly to more fuel-efficient hybrid and electric automobiles.

How slower demand for gas could affect prices years from now remains to be seen, but for now it has pushed prices lower.

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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.

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