Monday, June 2, 2008

Oil Crisis Worse Than The Housing Crisis?

Oil tankerThe housing crisis in the U.S. is bad, but is the oil crisis even worse? I read an interesting article that takes the stance that the oil crisis is in fact a bigger problem than the housing crisis, and I wanted to share a few of the points that the author, Jeremy Siegel, Ph.D., made.

The first point that Siegel made was that the U.S. is a net importer of oil--in fact, the largest importer of oil in the world. Each day the U.S. imports around 12 million barrels of oil at a cost of around $1.5 billion. That adds up to $570 billion a year in foreign oil imports, and makes up a large chunk of our trade deficit.

The housing crisis has surely hurt the U.S. economy and has resulted in the reduction of construction spending and the loss of many construction jobs. At the end of 2005 the U.S. was spending around $600 billion a year on residential construction, according to Siegel, and that number has now dropped to approximately $400 billion. So that, of course, is a net reduction to the economy of $200 billion, a sizable amount by any calculation. Now let’s take a peek at the impact of oil.

In 2005 oil was going for around $50 a barrel, so at 12 million barrels a day that would mean the U.S. was importing around $600 million in oil each day, or $219 billion each year. If you compare those to the numbers we looked at earlier, at today’s oil price of $130 a barrel, you see that the difference is $351 billion a year. Simply put, the oil crisis has had a greater impact on the economy’s bottom line. [Siegel makes his comparison based on 2007 oil prices, but since we were comparing housing prices from 2005 I thought a 2005 oil comparison would be better. Therefore these numbers are my own and not Siegel’s.]

The next point that Siegel makes is that the oil crisis is much worse than the housing crisis because the housing crisis was caused by a slowdown in demand, whereas the oil crisis was largely the result of supply issues. This means that resources that were slated for housing, such as labor or materials, can now be used in other sectors of the economy. “In contrast, rising oil prices are an outright cost that does not release other resources into the economy,” Siegel said.

Siegel goes on to explain that there are some adjustments which need to be factored into the estimates, such as the fact that consumption of oil tends to decrease as prices rise, but I’ll let you read the full article to hear about all of those.

Siegel ends his article with a statement of hope: “The rise in oil prices has shocked Americans into realizing that fossil fuels are not unlimited. In the long run I am optimistic that conservation and alternative fuels will significantly blunt the impact of rising oil prices and not constrain economic growth. But getting to that long run will require painful adjustments in the short run and, to that end, higher energy prices may be a blessing in disguise.”

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