Oil Industry and Real Estate Woes Explained

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As I read countless blog posts about the real estate bail-outs and oil industry woes and the speculations on why we are in the situations we’re in, I thought I’d share something I watched the other night I during an interesting segment about the oil industry on the television news show 60 Minutes.

The segment really focused on one thing: gas prices were not driven by true supply and demand but by speculative demand. Investors and individuals instead of buying stocks started buying barrels of oil on the futures market. The demand for people actually using the oil was not there – but the demand for people hoping to make money by buying it and selling it for a higher price was. According to the information they provided, it’s not Exxon, Chevron, or any other gasoline company that owns the most oil in the U.S. It’s Morgan Stanley and their subsidies that own the most. Naturally, this causes one to raise an eyebrow.

For the past year we’ve struggled with gas prices above $4 a gallon, only to finally see some relief when the price of oil finally fell and now most of us are paying less than $2 a gallon to fill up our cars. During this time, people have also become more aware of how much gas they are using and working continually to lower the dependence and need of oil. Many people have decided against buying a Ford Expedition for example and instead have opted for hybrids and better fuel efficient cars. While the Ford Expedition is a luxurious SUV with a roomy interior and powerful drive train, it only gets about 14/20 city/highway miles per gallon. The gas mileage issue is enough for people to overlook its high safety rating and features such as dual automatic climate control.

The prices of oil have hit car manufacturers hard – many needing to reduce their worker’s wages in order to receive assistance money from the government and some in jeopardy of going out of business permanently. Other countless companies have similar problems from the rise in oil prices, which does not make the job market look too secure or promising. No jobs also means unfortunately less people with money able to buy houses.

While I was watching this segment on 60 minutes, I realized that most likely the same issues that caused the oil industry problems are likely also the same issues that are causing the real estate housing crisis so many of us are concerned about. It all comes back to speculative demand.

Think back to 5-7 years ago, and a house no longer was a home – it was an investment. People would buy a house in certain “hot markets” only to list it – and sell it sometimes the very next day for considerably more than they paid for it. People stopped buying a house because its where they wanted to live – some people bought several houses only for the purpose of selling it at a higher price. Builders started getting caught up in the action and building more homes – even though the need for additional housing in most areas wasn’t actually there.

There was never a true demand for the housing. It was all speculative demand created by people hoping to “get rich quick”. When the investors started bailing and there were more houses available than jobs to support people living there, prices naturally began to fall again to where the real demand actually is. And now what we have is a “real estate economic crisis” – but in reality, things are just back to the definition of “fair market value” because the supply and demand has finally balanced out.

What do you think? Is speculative demand the cause of our economic woes? Share your comments below.