So I’m listening to the radio today on the way to the airport and I heard an really interesting report on the economic impact of lower gas prices. According to this report lower gas prices translate to more people driving farther and spending more and looking to buy bigger cars which helps the economy. (Grammar notice: periodically I LOVE run-on sentences – can’t help myself.) In fact, the reporter goes on to say that for every $0.01 gas prices fall Americans save approximately $1B dollars. He then said that gas prices have fallen almost 60 cents this year and that means there’s $60B extra in the economy that we will use to buy goods and services.
Now I’m not going to argue with the facts – but I will question the conclusion. To be sure I wasn’t crazy I decided to do a little math. I calculated the average size of a fuel tank in an American car, estimated the average number of times people fill up each month, looked up how many cars are in service in the U.S. and then multiplied all that together to get this result:
It turns out that I was able to get to almost exactly $1B in savings on my first try – now for those of you that know me this shouldn’t surprise you because my estimation and projection skills are widely revered as top notch – of course so is my modesty. Regardless, the most important point here is the per capita savings – $4.08. Yes, each American will save approximately $4.08 for every $0.01 in lower gas prices per YEAR. Now when you get to 60 cents it’s a little more impressive – $244.80 for the year. The problem is that we don’t save in this country and even if we did, the money comes into our budgets in small increments – $0.17 at a time as a matter of fact. Yes, for every penny the gas price drops at the pump we save on average seventeen cents. I don’t know about you but I am not in the habit of making $0.17 deposits to my savings account, and certainly not 24 times in a year. Furthermore, I don’t know that I have the commitment to keep track of the high water mark of fuel and then deposit the decline in pennies times the number of gallons my tank holds. The problem with national numbers is they are just that national. They are very large and very impressive to be sure, but in a $16.8T – yes that’s a T for Trillion – economy, saving $60B isn’t that significant. In fact expressed as a percentage, it is .0037% of our economy. Now, see what I did there, I used the same trick the media used on me but in reverse. I took a very large number and divided it by an even larger number to make a ridiculously small number. See how easy it is to change the implicit truth of something.
So yes, I just got done telling you that $60B isn’t a lot of money and of course that is silly, it is a lot of money. It is in fact 73.1% of Bill Gates’ net worth this year – but again, that’s a tangent. It is a big number and it is important. Lower gas prices do impact consumer sentiment but I think it is at least misleading and at worst manipulative to suggest that since we are saving $60B this year that will mean the economy will be much better.