HOW THE US HOUSING BUBBLE CAUSED HIGH OIL PRICES

Why are oil prices so high when US usage is going down, home foreclosures are accelerating, and banks are going bankrupt in record numbers? What will happen next as economic contraction accelerates?

Hilo, Hawaii is a great place to consider these questions. Situated between the US mainland and Asia we can watch the late news in New York as the markets open in Japan. We are thousands of miles away from both of them and have the time to contemplate the cause and effects as we watch the ships come in and out of Hilo Bay. We sip our Hamakua Coast coffee in the mornings gazing at the tropical sunrise and postulate about the world economy and how oil prices could get so high even as the US economy is crumbling?


Even though US housing values leveled off in 2006 and have fallen steeply since, oil prices have continued to go up.


Our initial conclusion was that the housing bubble created the current oil bubble because the US public had easy access to credit and wealth from their houses allowing them to spend trillions of dollars on goods from emerging countries such as India, China, Malaysia, and Indonesia. These countries, awash in trillions of US dollars from the goods they sold, were able to subsidize oil prices for their citizens to support their economic growth through cheap energy. Even though world oil prices rose, the demand in Asia continued to increase due to their oil subsides, causing oil prices to escalate. This conclusion has recently been promoted by many economists who have laid the blame for high US gas prices on China and other emerging Asian countries that are increasing their consumption while subsidizing the price of gasoline.

We collected the world’s top 28 oil consuming countries (based on their daily bbl consumption) representing over 86% of the world’s daily oil usage and calculated the percentage of the world’s overall consumption they each daily use. We then overlaid their current major metropolitan gas prices. The graph of the data supports the case that low gas prices are related to consumption. It is striking to see that over 25% of the world’s daily oil consumption is in the US (China is a distant second at less than 9% of the world’s daily oil consumption) and at $4.10 a gallon the US has one of the lowest gas prices in the world.
We wondered about the usage trend for the top oil consuming countries. The data shows that Japan, Germany and Canada’s oil consumption has fallen over the past years while US consumption continues to grow. China and South Korea have increased their daily oil consumption, but they are still using a small fraction of the US’s daily usage. The US has had the largest increase in oil usage over the last few years and its consumption was high to begin with.

The large increase in US housing prices started in 2003 and we see that oil consumption in the US and China surged in that year and has been climbing strongly since, especially in China. US home equity and easy credit bought large SUVs that got fewer miles per gallon than earlier small sedans. One third of all the cars on Earth are driven in the US so when drivers switched to cars that get ½ the gas mileage than they did five years ago it created a massive increase in demand for oil. Asian oil consumption, though growing with the increase in personal automobile ownership, has barely taken off.

The surge in oil consumption in China correlates with rising US housing prices. Economists use different figures to describe the extent to which US housing values increased during the bubble; some say $5 trillion, some $7 trillion, and some $11 trillion. No matter what figure you use, the easy credit economy in the US massively increased the US purchasing of goods and services from China, India and other parts of Asia. The manufacturing of products in Asia has required additional energy as well as fuel to transport the goods to US buyers. The fleeting credit wealth created by the housing bubble in the US resulted in huge increases in oil consumption in the US and Asia.

This research has given us new insight into the importance of the many alternative energy projects underway on the Big Island of Hawaii and new respect for countries like Germany that have been aggressively investing in renewable energy in the last few years. Until the average US consumer is motivated to live an energy efficient lifestyle, we have only ourselves to blame for the spiraling price of oil as well as the negative environmental impacts due to drilling, processing and burning petroleum.

DOG DAYS OF SUMMER IN HILO, HAWAII

We don’t know if this is normal weather for Hilo, but it has been sunny and cool compared to the sultry days we were expecting. It rains at night but during the day the sun takes turns shining brightly and peaking through the clouds. Wonderful breezes cool us in the afternoons.

I remember the rare summer day when I was a kid in Colorado, when the sun and breeze created the perfect day. But in Hilo this summer, we’ve had 6 weeks of perfect summer days. After a hard 20 minute rain shower, unlike Northern California and the Pacific Northwest, the rain stops, instead of endless days and months of drizzle and dreary overcast skies. When it does rain here during the day, it is very business-like; a cloud moves in, rains for awhile and then moves on. It is delightful!

Our volcano is celebrating the summer by opening new vents and displaying colorful fountains of lava high into the air. It is incredible to witness the changing earth so close.

Music rings out from the young and old strumming guitars and ukuleles in the parks and we revel in the glorious summer days in Hilo.

THE ILLUSION OF EMPLOYMENT: When it Costs Less to be Unemployed

As we slowly relax in laid-back Hilo, Hawaii, we are reflecting on what was so stressful about living in Silicon Valley and why it is so relaxing being unemployed in Hilo.

When we moved to Silicon Valley 10 years ago, we collected take-out menus from all the area restaurants which accidentally documented the increasing cost of living there. Over 10 years, as the prices increased, we crossed out the old prices and wrote in the new. In 1997, a burrito cost $1.75, then $2.75, then $3.75, and by 2007 the same burrito was $8.75.

In those same ten years our income rose by 50%. Using the Silicon Valley burrito index (comparing salary increase to burrito increases) our income increase was from $1.75 to $2.63, only 29% of the overall burrito increase over 10 years. This is a 69% drop in pay relative to the cost of a Silicon Valley burrito. We were met with similar high percentage cost increases in housing, rents, services, and food costs. So, though Silicon Valley salary increases seemed high, compared to the actual costs of living increases in Silicon Valley, our salary was effectively 69% less than when we arrived.

Over those same ten years the work environment changed dramatically in Silicon Valley. In 1997 it was all about new products, new technologies, and meeting deadlines. By 2005 the only question in Silicon Valley was how many engineers in Asia could be hired with your salary as engineering and operations were moved out of Silicon Valley. Bonuses, pay raises, and stock options disappeared as we struggled to cover our rising monthly costs. Stress and high expectations resulted in us spending more and more on eating out, entertainment, and trips out of town.

The cost of living in Silicon Valley exceeded our income so that we spent more money every month than we earned. The promise of wealth from our worthless stock options and stories of the many Silicon Valley high-tech millionaires fueled our continued drive to stay on. In the end, being laid off became the impetus for us to make good on our dream to live in Hawaii.

Eight months into our life in Hilo, one of our realizations is that it costs less for us to be unemployed in Hilo then it did for us to be employed in Silicon Valley.

Everything we like is cheaper in Hilo. Hawaiian papayas are one of our favorite foods; in Cupertino they were $3.95 each in contrast to Hilo where they are five for a dollar at Farmer’s market, 5% of the cost of Silicon Valley papaya. Fresh tuna ran $28 to $70 a pound depending on whether it was from Viet Nam, Thailand or Hawaii. In Hilo, fresh caught Hawaiian Albacore Tuna steaks are $5.50 a pound, 8% of the cost of tuna in Silicon Valley. Rent for our dumpy apartment in Cupertino between two major freeways with choking pollution and deafening traffic noise was $3000 a month versus the $1350 a month rent for our Hilo house with great views near the University of Hawaii.

We have time to cook which is cheaper than buying prepackaged foods and we rarely eat out. We have no commute and so we rarely fill our gas tanks. We have downsized our spending in every area, no longer needing to spend excessively to reduce our stress and preparing us for a future career with substantially lower salary requirements. Our monthly Silicon Valley paycheck withholding for Federal and State taxes, Medicare, social security, SDI, and benefits was more than we spend every month in Hilo for everything. And everything includes family medical coverage through Kaiser, life, car and rental insurance, in addition to our rent and living expenses.

There are priceless things that we have gained by living in Hilo: improved health, quiet and calmness, fresh air, sunlight, and time to think about things other than work or surviving the next lay off in Silicon Valley. Though we are spending savings to be in Hilo (we have chosen not to collect California unemployment), we have discovered that lowering our stress and improving the quality of our lives has resulted in us losing less money each month in Hilo then we did in while in Silicon Valley. We have gotten our lives back through gainful unemployment in Hilo, Hawaii.