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The True Cost of Cheaper Gas

Filling up your car for less than $2 a gallon? The falling price of oil means that gas is much cheaper these days. That may seem great. After all, it means you’re left with more money in your wallet to spend, save or to use to pay bills. But the real question is, what does this trend mean for the economy at large? Read on to learn more about the true cost of cheaper gas.

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The Declining Price of Oil

So why is the price of oil falling? Part of the problem has to do with supply and demand. When supply is high and demand is low or stagnant, prices go down.

Right now, countries across the globe are overproducing oil. In fact, U.S. production alone has almost doubled. There have been efforts to try and cut back on the amount of oil being produced, but so far those actions have not done enough to reduce the surplus of oil. 

Meanwhile, the demand for oil is much lower than it once was. So oil prices continue to plummet.

How Low Gas Prices Affect the Economy

The True Cost of Cheaper Gas

You don’t just feel these changes at the pump. Lower oil costs slow inflation, and can keep the prices of other goods and services low. Food prices, for example, might go down if companies don’t have to pay as much to put fuel in their delivery trucks.

When oil prices are low, motorists can drive more often without having to take as much of a financial hit. With more money in their wallets, consumers might be tempted to spend their extra money on restaurants and hobbies instead of using those funds to pay bills or save more for retirement.

Find out now: How much do I need to save for retirement?

On the other hand, when gas is cheaper, both road travel and the number of traffic accidents can increase. And while there are more electric cars and energy-efficient vehicles available, automobiles still produce significant amounts of air pollution.

Too much inflation isn’t good, but low inflation and deflation can be just as problematic. Falling prices can cause businesses to suffer. People can lose their jobs and if enough folks stop spending money and start defaulting on loans, an economy can eventually fall into recession.

Check out our inflation calculator.

Final Word

The True Cost of Cheaper Gas

While cheaper gas can be beneficial to consumers and countries who import oil, the falling price of fuel can hurt economies in the long run. Oil prices at the moment remain low, but they’re expected to bounce back as 2016 comes to a close.

Photo credit: ©iStock.com/BraunS, ©iStock.com/JaysonPhotography, ©iStock.com/MCCAIG

Liz Smith Liz Smith is a graduate of New York University and has been passionate about helping people make better financial decisions since her college days. Liz has been writing for SmartAsset for more than four years. Her areas of expertise include retirement, credit cards and savings. She also focuses on all money issues for millennials. Liz's articles have been featured across the web, including on AOL Finance, Business Insider and WNBC. The biggest personal finance mistake she sees people making: not contributing to retirement early in their careers.
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