High gas prices increases transportation costs. This impacts delivery of raw materials to manufacturing plants, delivery of finished products to stores, delivery of agriculture products (food) to stores, costs in consumer transportation (cars, buses, ferries, planes (avgas)). This drives up consumer prices.
High gas prices are the result of high crude prices and/or high global demand. Gasoline competes with plastics, heating oil and lubricants for crude. If gas goes up, it's also likely that lube oils are more costly, that heating oils are more costly, which in turn increases the operating costs of manufacturing plants, which also leads to increased consumer prices.
Less money in consumers' pockets due to higher costs results in less commerce for discretionary items. This is what leads to a poor economy.
So what about the idea that low gas prices is a leading indicator of a cratering economy? I don't think so. Gas prices are driven by supply and demand, but crude is also very fungible. If the theory is that a faltering economy uses less gas, and therefore low demand pushes prices down, therefore low prices reflect a poor economy that isn't using energy like it used to, remember that the crude would simply be sent overseas to economies that will use it. Oil companies will not settle for cheaper prices, they will sell the oil at competitive prices in other markets, reducing supply here and keeping prices constant.
Higher prices is the result of low supply as well as higher demand. Eventually, supply will match demand at a market price point. Romney was saying that Obama cut off drilling in the Gulf of Mexico, the east coast, and federal inlands. Obama also blocked the Keystone pipeline from Canada. These all contribute to lower supply, which is driving up prices.
If Obama is saying that lower gas prices means a bad economy, and therefore that higher gas prices means a good economy, he's wrong.
-PJ
The low gas prices are more of a coincident indicator not a leading indicator. They might even be slightly lagging.
However, it was actually an oil price shock that set off our economic crisis. That’s what caused the dry up of disposable income, the rise in unemployment, the mortgage defaults and the bank liquidity crisis, in that order.
So actually an excessive rise in oil prices is a leading indicator and causative agent of an economic recession.
My take on oil prices is somewhat different. No one here is addressing the Fed’s impact on oil prices. Oil is traded in US dollars. The Fed has been printing money for the past 4 years, big-time. So the real value of a dollar has been diminished, by how much I couldn’t say. So the sheiks want more of these cheaper dollars for their barrel of oil.