The chart above shows the
dramatic fall in the price of crude oil since the middle of 2014. As we pointed
out before, this is the one of the major components of the low inflation that
has some central banks, but most notably the European Central bank (ECB) so
worried. Call us cynical, but our opinion now is that this fear of deflation
has more to do with the expectation that average price rises of around 2% per
annum and rising would artificially reduce the level of debt that exists around
the world, than a concern that people will put off purchases and thereby delay
consumption led economic rebound.
Unless one lives in a
jurisdiction that is totally dependent on the export of oil, the current drop
in its price is unequivocally a good thing. This is because, as various writers
in the Wall
Street Journal have pointed out, so long as the fall is as a result of
increased supply as opposed to falling demand (which is the case this time
round), it will provide people with extra cash with which to purchase more
goods. It is like a tax refund, in many ways.
Winners and losers
I am also grateful to the WSJ
for the chart above, which shows an estimate of the effects of the fall in oil
price on the various regions of the world that stand to be most affected. The
oil producers, naturally, will feel a pinch, but for the rest of us a fall in a
large personal and business expense is certainly calculated to be a benefit.
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