Wednesday, December 10, 2014

Oil price fall and deflation… | Both of them are good

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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