Cheaper gas not the answer

Experts say lower gas prices should help consumers but won't be enough to jumpstart the struggling economy.

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By Chris Isidore, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Gas prices have tumbled 30% from their record high in July and are poised to fall further. But economists say that cheaper gas won't be enough to revive a struggling economy.

No one doubts that lower prices are putting extra dollars back into consumers' pockets. With the average price of gas costing about $2.86 a gallon, or $1.25 a gallon less nationwide than it did at the peak in July, that translates into nearly $500 million a day in savings on gas purchases.

"This acts like a tax cut for consumers," said Gus Faucher, director of macroeconomics, Moody's Economy.com. "Consumers will have more money to spend on other types of things."

But gas prices are dropping greatly because of lower demand for oil in the U.S. and around the world due to a weaker economy.

So the benefits of lower oil prices are expected to be offset by other factors, such as tighter credit, falling home prices and rising unemployment. That is likely to lead to a pullback in consumer spending.

"We certainly need to do more than count on gas prices to bail us out," said Faucher. "The problems are much more severe than that.

Other economists point out that while prices are well off their all-time highs, they still have only fallen back to year-ago levels, which were still considered expensive for many consumers.

"At $3 a gallon, we're back to neutral. I wouldn't see it as stimulating the economy," said Brian Bethune, chief U.S. financial economist for Global Insight.

Bethune said that because of how high gas prices spiked this summer, many Americans are unlikely to resume spending based on the assumption that cheaper gas is here to stay.

"I think they'll say, 'Why should we assume this is permanent? It will only go back up again,' " he said. "In that case it will do little to affect behavior."

What's more, even though lower gas prices are clearly a relief for consumers, the impact is more gradual.

The average U.S. car or light truck uses 600 gallons of gas a year, or about 12 gallons a week. So even if gas prices fall another 25 cents from current levels, that only works out to a little less than $20 in savings a week for a typical American consumer.

To be sure, the annual savings from lower gas prices may still wind up being larger than the rebate checks most taxpayers got as part of the economic stimulus program passed by Congress earlier this year. But that still may not make consumers feel that much better about their finances, according to Mark Vitner, senior economist at Wachovia.

Vitner said lower gas prices won't have quite the same impact as that stimulus program, which helped to lift the economy in the second quarter.

Nor will cheaper gas lessen the need for Congress to pass another economic stimulus plan, he said. That's because there is a big difference between the impact of saving a little bit of money each week and getting a large chunk of money all at once.

It's also worth pointing out that while consumers may be paying less at the pump now, falling oil and gas prices have come too late to give many Americans relief when they get their home heating bills this winter.

According to estimates from the Energy Department released earlier this month, the average cost of oil heat this winter will be up $449, or 23%, from a year ago while those using natural gas can expect to pay $155 more, or 18%, to heat their homes.

So Vitner is still projecting a drop in spending on holiday shopping this year -- even though he concedes that sales might have been worse if gas prices were still at record levels.

"They'll help keep the holiday season from being horrendous. Now sales will just be bad," he said. To top of page

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