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  • Decline In Crude Oil May Bring On Deflation

    Deflation, at least for an extended period of time has not been experienced in the United States for many generations, perhaps as far back as the first Great Depression of 1932. Do you know what deflation is? Wikipedia defines deflation as, “A decrease in the general price level of goods and services.” Lets look at some charts;

    For every 1 cent drop in the pump price of gasoline over a 12-month period, the US Economy grows by $1.4 Billion. Let me say that again $1.4 billion contribution to GDP for every 1-cent decline in gas prices. The first chart is the wholesale price of gas on a year to date basis. The National Retail Federation forecast that the Christmas shopping season this year will net $619 Billion in sales. The wholesale price of gas has dropped by 67 cents since June 20, this decline alone could fuel up to 15% of the sales in the coming Christmas Season.

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    The next chart, is the price of crude oil, on June 25 it hit a high so far for the year of $103.66. The recent close on Friday was just over $78 per barrel. WTI has dropped nearly $26 from its high this year. The price for gas at the pump is lagging behind the fall in crude.

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    The next chart is Wheat. The price of wheat has dropped from its high on May 5th, of $760 to $514 last Friday, for a decline of $246 per contract.

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    The last chart is gold, which reached its high in March at $1,390 now stands at $1,169 or a decline of $221 per oz.

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    I could have presented more like corn, from $5.12 to $3.67, or sugar, from $19.63 to $15.68. What this all means is that prices are coming down, and will continue to come down for some time to come. Add to all the price declines, the additional fact that the dollar is rising against most currencies, as an example; in February it took 100 yen to the dollar, now it takes almost 115 yen to the dollar, the rise in the value of the dollar makes our money go further.

    As prices for raw materials fall, then the prices of finished goods will also fall. Companies will be reluctant initially to reduce prices, they will want the raw materials cost to stay down before they start cutting prices, but competitive pressure will force prices down. My greatest concern is, that for the most part the rest of the world is in economic malaise. The central banks are doing everything they can, to stimulate their economies. We have a divergence between the American economy and other economies. America is coming out the other side of our Great Recession while other countries are just beginning.

    So, given just the value of the decline in gas prices alone, American consumers will have more money to buy gifts this Christmas, and that is a good thing. We have a Christmas present that will be opened in the first week of the New Year, a Republican House and Senate, and people are wondering what should be the first move this Congress should make. Some are talking about Keystone; others are suggesting the dismantling of the Affordable Care Act.

    I think the best thing for the country is for the Congress to lift the ban on exporting crude oil from the United States. We have the most competitive price for crude and natural gas, and we can compete very favorably against OPEC. Lifting the ban will open many new markets for American crude, and put millions of Americans back to work. A good paying job, that brings increased self-esteem, money in the bank, and people who are happy, is the greatest gift under any Christmas tree.

    Dan Perkins is a Registered Investment Advisor with over 40 years of investment experience. He is also the author of the trilogy of the Brotherhood of the Red Nile, a story about a terrorist nuclear attack on the United States. Dan can be reached at his book web site www.danperkinsatsanibel.com.


    Dan Perkins

    Dan Perkins is a novelist who has written a trilogy on a terrorist attack against the United States. The Brotherhood of the Red Nile series is available at Amazon.com. Mr. Perkins book web site is www.danperkins.guru.

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