The top chart shows the inflation-adjusted price of Arab Light crude oil (adjusted using the Personal Consumption Expenditures Deflator). Oil has plunged since July, as have most commodity prices, and this in turn has sparked much discussion about deflation. A true deflation, however, is when all prices decline, not just some, and we aren't seeing that at all; witness the continued positive increase in the ex-energy (core) measures of inflation. Moreover, although the decline in oil has been fairly spectacular, oil is still, in real terms, much higher than at any time from 1986-2005. That's another way of saying that energy prices have, even net of their recent declines, risen by more than the average price level have since 1985.
The second chart compares the price of oil to the price of gold. Since gold tends to hold its real value well over time and tends to foreshadow future changes in the price level, this may give us a better feel for what is really going on with the price of oil. Compared to gold, oil is trading very close to its long-term average price; it's neither expensive nor cheap, and that's roughly the same message of the top chart.
So the take-away I get from this is that the oil price bubble has popped, and oil is now trading at a much more reasonable level from an historical perspective and relative to other prices. As John Tamny writes, it can be very confusing when prices rise and fall dramatically as they have done in recent years. This contributes to the uncertainty and lack of confidence which is affecting the entire economy. It's good that oil is back to more reasonable levels, but it's bad that the price of oil has been so volatile. In the end, the message is that this is a story that has more to do with volatility and uncertainty than it does with deflation.