Paradigm Shift 4: The Energy Market

In July 2008, oil peaked at slightly more than $150 per barrel, having more than doubled in 12 months.  As a result, gas at the pump peaked at something in excess of $4.50 a gallon in July of 2008.

The cost of commuting became extremely burdensome to those who drive to outlying markets to find the home they can afford.  At the same time, their cost of heating and cooling their homes, the cost of their food because of increased transportation, et cetera were all sky rocketing.  The pain that the consumers felt in the summer of 2008 because of energy costs obviously reached a tipping point.

The last time we saw something similar was in the mid 1970's as a result of the 1973-74 Arab Oil Embargo.  At that point, gasoline more than tripled and the patterns of commuting shifted dramatically.  No longer were people willing to drive out to a rural area in order to buy a home on a small lot.

In fact, it was approximately seven years from the time that the cost of energy surged before the American public was willing to once again venture out in order to fund less expensive housing.  Further confusion has been created in the market place today by the proposed carbon tax credits, otherwise known as cap and trade.

Capitalism generates prosperity when three factors are present - low taxes plus low interest rates plus known rules.  Only two of those three exist right now.  No one knows what the rules will be on a whole variety of issues including the cost of energy (Cap & Trade) and health care.  Therefore, consumers and businesses alike are simply sitting still waiting for an answer.

Despite having failed elsewhere around the globe, one has to assume that cap and trade will pass.  Based on its failure elsewhere, the result will be soaring energy cost, inflation, and severe economic distress.

The uncertainty about taxation is not in the direction, it is obvious that taxes are going to increase.  The confusion is by how much and in what form will taxes increase.  Because consumers and business owners only make decisions when they feel like they know the rules of the game, the uncertainty is creating part of the economic malaise and it is hindering economic recovery.

For a more complete discussion and our forecast of the real estate market in 2010 and 2011, please download the presentation we made to the Board of a large community bank entitled "RE/set, RE/position and RE/start".