If Cheap Oil Prices Are Good for the Economy, Why Is the Stock Market Down?

WTI Crude Oil Spot Price data by YCharts

If cheap oil prices are good for the economy, why is the stock market down? Well, it's a little more involved than that. Let's take a deeper look at this very important question that affects us in more ways than just the price of goods and gasoline.

Oil, gas, and the price of everything you buy

Energy costs influence the price of every good and service that you pay for. Using something like a pack of chicken as an example:

• Natural gas is used to make the fertilizer that is used to grow the feed for the chickens, and to heat the chicken houses in cold weather.
• Diesel fuels the tractors at both the farms that grow the feed, and where the chickens are raised. It also fuels the trucks and locomotives that transport the feed, and the chickens.
• Coal and natural gas power the electricity that runs the processing plant where the chickens are processed and packed for retail customers.
• More diesel getting the chicken to a regional distribution center your grocer uses, and then more diesel in its delivery trucks.
• Gasoline in your car to get to the grocery store, which uses coal or natural gas for its electricity.

In short, every part of the chain is affected by the cost of oil. For the locomotive operators, diesel fuel is usually the most expensive line item on the budget, and it can often be the same for trucking companies. And since these companies pass along a fuel surcharge to their customers like the grocery chains and farm operators, the price gets passed along to consumers.

Oil as an ingredient

Why does this matter to Americans? In short, Europe is a big customer for American companies, including the oil and gas companies that employ hundreds of thousands of people in the U.S., both directly and indirectly. Weakening demand for oil, and falling oil prices, could lead to production cuts, or at least slowing production growth, and that's not good for American jobs.

750 million Europeans command $37 trillion in wealth. That matters to your retirement account.

And if prices stay down for the long term, it's because demand isn't rebounding. That's not good for companies that do a lot of business in Europe -- the world's richest continent -- and Asia. So while the U.S. economy remains relatively strong, even if the recovery has been very slow and isn't nearly complete, domestic oil and gas production has been a real bright spot. And that could come to an end if oil prices keep falling.

The impact you might not see today, but could feel later

While it's easy to think that weakness in Europe doesn't matter much here, or that those big companies' problems don't really affect you, that's probably less true than most people realize. Almost 100 million Americans have invested in a mutual fund, and the vast majority of mutual fund holdings are stocks in multinational companies. So even if your employer doesn't do business overseas, chances are your retirement nest egg is exposed to international economies. On average, half of the net worth of those who own mutual funds is held in those mutual funds.

So while cheap gas is nice, oil prices falling sharply isn't the kind of thing that anyone should want to see -- especially if it continues for a long period of time, because that means one of the world's largest economies is struggling. Oil is a major ingredient in the global economy -- stability is much more important, and better for everyone.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.