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If there was ever any concern that consumers would face higher gas prices, it may well be gone. And the case for deflation is growing.
More and more analysts are coming to the conclusion that oil supplying nations cannot drop the price of crude fast enough to keep up with slumping demand.
According to MarketWatch, "The International Energy Agency on Friday forecast that world oil demand will drop for two consecutive years, the first time it's done so in 26 years."
If the forecast is accurate, the price that consumers pay for goods and services could be pushed down for another year because so many of the things that they buy are oil-based. The drop in crude could also make the exploration and refining of oil much less profitable, adding to the wind that deflation takes out of the sails of the economy.
Of course, all of the prediction about cheap oil may be an illusion. OPEC has not tested demand to the extent it could. It has been talking production down by about two million barrels a day at each of their meetings in September and December. If tempted by economic need, the next cut could be four or five million barrels. Even a sharp drop in demand might not cover a cut which is that radical.
As the move to $141 last summer proved, counting chickens before they are hatched is not a prudent way to forecast oil prices.
Douglas A. McIntyre
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