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Don’t go looking to buy a V8 just yet!

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Yesterday I arrived at the service station all excited to pay just 71 cents per litre of diesel, because I’d scored myself a 10 cent per litre discount. But I was severely disappointed – I couldn’t get the minimum $40 into the car tank to get the discount, no matter how I tried! It got me thinking – in 2012, crude oil was $115 US a barrel. Today, for the same barrel it’s $26.21 US.

Cheap oil is a double-edged sword. It has a strong disinflationary impact on everything we buy. Lower transport costs should reduce the cost of just about everything we buy. And what people do is stop spending today, and wait for things to get cheaper, as the reduced transport costs start to flow through. This is great for the individual, but not so good for the economy.

Cheap oil makes it easier for our dairy competitors to produce a cheaper product, as the cost of grain goes down – so not great for our exports or economy.

You may have noticed, cheap oil doesn’t help the world stock exchanges either. Basic economics of supply and demand states that if price falls and demand stays constant, then supply will fall. When that happens, prices will start to increase again. So don’t rush out and buy a V8 just yet, as my pick is that fuel will not be at these prices in 12 months’ time.

In the meantime, enjoy the extra $20 – $40 a week these lower fuel prices are saving you. Here is a crazy thought – rather than spend the extra $40 a week, put it in a separate bank account and in 12 months’ time, you will have saved $2,080!

We love to talk about tips and smart tricks around money. Give us a call – let’s talk about how to improve your balance sheet.

John Barber
WealthDesign – a life well planned