Wednesday, July 23, 2008

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.

12 comments:

larry said...

but will alternative energy sources actually be built in hawaii (or anywhere) without being stopped in government red-tape and environmental issues? as someone who helps wind and solar plants get permits i can tell you first hand that the biggest thing holding back alternative energy is getting the ok to build.

we would be better off just putting solar panels and solar water heaters on every house. that would cut down on energy needs faster and is something that can be done today while we wait for alternative energy plants to come on-line.

HiloLiving said...

Larry - We agree, solar panels provide the fastest and best economic individual return, particularily for Hawaiians. Although Hawaii uses diesel for electricity generation, the power generation for electricity on the mainland is not a big oil user. The transportation sector is the largest oil consumer in the US, so that has to be addressed to reduce the astronomical daily oil consumption.

bearmaster said...

Maybe my brain isn't functioning today but I don't understand the first chart - Percentage of world-wide daily oil usage by top oil consuming countries.

Is there supposed to be a pattern here? I am unable to see any obvious correlation. Some countries that consume very little of the world's oil supply (Egypt - 0.79%) pay relatively little while some countries that consume very little of the world's oil supply (Belgium - 0.74%) pay a lot.

Looking at the bar for the U.S., it is evident that the U.S. has enjoyed "subsidized" oil, but it's been that way for decades. Did the status of the USD as the world's reserve currency work to the benefit of the US all those decades and is the US about to experience major "blowback" should the dollar fall out of favor, as it seems to be doing?

HiloLiving said...

Dear Bearmaster: Our point of the first chart is to show that US gas prices are low compared to most other countries and US consumption is out of scale with the rest of the world's consumption. This is in contrast to recent assertions by economists that subsidies by emerging Asian countries are responsible for driving up oil demand and causing rising US gas prices. The increase in the US consumption alone over the past years is greater than the entire Asian increase in consumption over the same time.

You raise the question did a strong dollar subsidize the price of gas by making imported oil cheaper. We think it did indirectly because major oil exporters price their oil in dollars so other countries paid more for oil when the dollar was strong. As the dollar has lost value, other countries get oil cheaper compared the US.

ndd said...

The first chart is great!

As to the second chart, it seems to me you have to normalize by population growth. The US, unlike any other industrialized country, and in particular Japan, is experiencing strong population growth.

HiloLiving said...

Dear ndd: Thanks for your comments.
Your observation of population growth differences between the US and Japan and Germany is certainly true today.

We reviewed the population growth for the US, Germany and Japan over the time period of the second chart of 1992 to 2007. During that time period both Germany and Japan had population growths similar to US (.9% per year). We found this historical population data on German and Japanese cultural sites as the CIA only publishes current population information. Let us know if you have a better source of historical population data.

ndd said...

2007 figures are available for each country on the CIA factbook. 1990 figures came from various sources, but boiled down to:
1990 2007
Germany 79m to 82m
Japan 124m to 127m
US 248m to 301m

ndd said...

Here's my source for 1990 population:

http://www.unb.ca/transpo/mynet/wrldpop1.html

HiloLiving said...

Dear ndd:
We have been looking at the data you pointed us to on population growth in Germany, Japan and US and we agree that the numbers strongly support your perspective that the increase in energy usage in the US is due to population increase rather than an increase in individual consumption. We calculated that the increase in US poupulation matched the increase in oil usage almost exactly.
This points us to comparing per capita usage by country instead of overall consumption by county.
Thank you very much for your comments and insights!!

Metalda said...

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

Lucy

http://forextradin-g.net

jerry said...

love to see this discussion! It’s great to see you all working through the issues and also, it’s great to see recommendations for testing. In the end, it’s what your actual users do and prefer that should be your biggest driver in making these decisions.

study abroad

Blogger said...

You might be qualified for a new solar rebate program.
Click here to find out if you're qualified now!