In a few short months, crude oil prices have fallen to levels not seen since 2009. The resulting drop in petrol prices will only reinforce the mix of strong domestic demand and low inflation that New Zealand has enjoyed of late.

Commentators have rightly pointed out that the recent slide in oil prices is ‘good’ deflation - the basic driver has been surging North American oil production, though the recent softening in global demand has no doubt also played a role. And the latest slide occurred after OPEC dispelled fears that it would cut its production levels to prop up prices.

We are sceptical that oil will stay this cheap for long. The new sources of Canadian and US oil are relatively expensive to extract, and the taps can be turned off more easily than in conventional oil wells. That suggests that production levels may be more responsive to lower prices than in past decades, which will limit how far prices fall.

For now, though, the oil producers are clearly pursuing cash flow rather than pricing power. For oil importing countries such as New Zealand that will provide some much-needed support for the terms of trade, which dropped 4.4% in the September quarter and are likely to follow wholesale global dairy prices down further over the next six months.

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