I always thought that the relationship between American economic growth and gas prices was a pretty straightforward one. High gas prices were bad for the economy and low gas prices were good for it[1]. It was pleasingly simple.

So when I googled “gas price economy” and saw a first page of results that consisted of things like “Gas Prices under $2 per gallon wreak havoc on economy, and “The Downside of Low Gas Prices” I felt more than a little perplexed, what was wrong with the story I’d always heard?

Thanks largely to a supply glut, the average gas price in the United States is right around $2.00 a gallon. This is cheaper than it has been in a while. It seems natural that having to spend less on gas would give Americans some extra money which they could spend on other things, and equally natural that this additional spending would give the economy a nice boost.

There are certainly some economic actors who suffer from low gas prices. The oil industry and the industries that work with it are the hardest hit.  US oil industry employment is down eight percent since October 2014[2]. This negative impact is greater than it used to be, as energy’s share of the US economy has been steadily increasing. The decrease in gas prices has had a disproportionately negative impact on the sorts of places that produce oil. In the US, this is places like Texas, Louisiana, Alaska, and the northern plains states.  Fall in revenue from oil companies hurts taxes, jobs, investment and other forms of economic activity.

A fall in oil prices is a genuine bummer for a lot of people. For the vast majority of us, who do not work in the oil business, it is a boon. Falling gas prices saved the average American $659 in 2014. This money not spent at the pump is usually spent elsewhere, and this additional consumption is historically thought to boost economic activity by something like 0.15-.25% per a 10% drop in real oil prices.

To determine the overall impact of a change in gas prices, one needs to calculate the amount of extra consumption by gasoline consumers and subtract out the amount lost by producers. Unfortunately, this simple calculation isn’t so simple to actually do. There are a lot of difficult variables, necessary assumptions, and complicated feedback loops that are tricky to untangle. An EIA economist roughly calculated (in his own independent research) a net impact of around zero, with the possibility that the decline in oil prices could hurt the American economy. A Credit Suisse team attempted to calculate the current aggregate benefit to the US and global economies and came up with numbers around zero for the net impact to US growth.

The economic benefit of cheaper gas prices comes in the form of this increased consumption. For this to happen, consumers have to go out and actually spend the additional money they have received. In aggregate, consumers have elected to save instead of spend. In the last quarter of 2015 the savings rate was 5.4%, the highest it has been in three years[3].  This increased savings rate has given commentators ample opportunity to express skepticism about the benefits of cheaper gas prices in terms of consumer spending.

It is worth being wary of such skepticism. A nifty report from the JP Morgan Chase Institute uses recent credit and debit card data to conclude that Americans spend around 80 cents of every dollar they would have spent on gas. This is a fairly high estimate, and provides evidence that Americans are actually spending their cheap oil windfall, just as we would have predicted them to.

Most observers, myself included, stick to the conventional wisdom that falling oil prices are a boost to the American economy. One cannot just look at high savings and weak economic growth in the fourth quarter and conclude that the fall in oil prices has had no effect. It is likely, that without the recent fall in oil prices the economic outlook would be bleaker still.

Gas prices certainly affect the economy, but the economy also affects gas prices. It is important to remember that gas prices are as much of indicator of economic health as they are a source of it. One reason gas is so cheap right now is fear of relatively slack global economic performance, and therefore energy demand, especially in places like China.

In some reporting, the three big economic stories: cheap gas prices, weak economic growth, and writhing financial markets often get lumped together in ways that imply a misleading causality. This story is a pretty good example of that sort of reporting. Despite some of the headlines, the net effect of falling oil prices is probably still beneficial to the economy.  Falling gas prices are good for the economy is not an interesting news story, but it probably remains the truth.

[1] Good for the economy. There are certainly downsides, especially environmental ones, to low gas prices.

[2] http://www.bloomberg.com/news/articles/2015-10-07/four-ways-the-oil-price-crash-is-hurting-the-global-economy

[3] http://www.economist.com/news/finance-economics/21689741-slower-consumer-spending-dragged-down-growth-americans-are-flush