The import crisis explained (and how it likely was the straw that broke the housing camel’s back).

But first our quote of the week:

"Right now, success is judged by how much energy is used. Think about it, the person who is successful has a really big car; they take really expensive vacations; they have a really big house. Now we have got to have another yardstick by which we measure success because success can't continue to be measured by how much energy we use." Congressman Roscoe Bartlett (R - Maryland), the only scientist in the U.S. Congress. (Good thing he is from Maryland. If he represented my district of Boca Raton, Florida, he wouldn't make dog catcher talking like that.) OK, let's get back to the issue...

Net oil imports (we really need these) to the U.S peaked in 2005 at 12,549,000 bpd, declined in 2006 to 12,278,000 bpd, and declined again in the first 4 months of 2007 to 12,039,300 bpd. As a matter of fact 2007 imports are slightly lower than 2004’s imports of 12,097,000. The price increase of oil (in U.S. dollars, no less) from the beginning of 2004 to the present? An increase of over 75% - from $40 to $71 (the close of the front month contract as I write this), so, please, don’t tell me that the "DEMAND" simply was not there. Truth is, there is a great deal of "demand" for $40 per barrel oil, just no "supply" of $40 per barrel oil. That’s the cool thing about neoclassical economics. "Supply" and "Demand" will always come into equilibrium through "Price". Unfortunately, that is a bunch of B.S., because in the very near future, we are going to "Want" a lot more oil then we are going to "Get", because the countries that are selling this oil to the U.S. have seen their domestic production decline, and the number of cars, homes, people, plastic manufacturers… increase dramatically as a result of all that money we are sending them for the oil they sell us. The U.S. will never again see 12,549,000 bpd of imports (unless bird flu or nuclear war breaks out in Asia).

Keep in mind that the world production peak of crude oil and condensate (not NGPL’s, ethanol, XTL, CTL…) occurred in May 2005. Is this a coincidence - peak imports and peak production having occurred in 2005? I think not. Now let us look at the mirror image of this: That the U.S. aggregate Vehicle Miles Traveled peaked in 2004 (yes, the Federal Government tracks how many miles we drive. Source: http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.htm)… makes sense when one considers that we can’t consume that which is not there.

So what’s this have to do with housing? Well, didn’t housing peak in the summer of 2005, too? Peak imports, peak production, peak miles traveled, peak housing… (how far behind can peak stock market be?)

The Federal Reserve stimulated the economy after 9/11 knowing full well that flooding the system with that kind of liquidity would likely cause some kind of asset bubble trouble. What they did not count on, and still do not count on, was the decline in energy availability for soccer moms and commuting dads (decreasing total trips to the mall) to get back and forth to their distant homestead, and the extra $400 per month in fuel costs, while exporting all of that extra money to the oil exporting nations in the form of IOU’s -and all of its concomitant effects on the U.S. dollar (don’t get me going) - while at the same time “Chindia” was busy exporting cheap labor. The U.S. was caught in the vice of monetary inflation and wage deflation – many things cost more, but wages were not rising due to pressures from overseas. (Please spare me the productivity crap that the Department of Commerce spoon-feeds the media, or “How we can all get rich by taking in each other’s laundry for a fee!” The Fed, clever as ever, came up with an ingenious plan. They no longer published the money supply measure M3! After all, if we can’t see it, maybe no one will notice! Ta Da! (round of applause… not)

I know, I know… what about all those unscrupulous mortgage brokers, realtors, and Wall Street investment banks? Yea, they really did take the ball and ran with it (and jammed it down not a few throats) but let me ask you something… If oil supplies were as plentiful versus demand as they were in 1999… and gasoline was a buck a gallon for the past 7 years… Wouldn’t the economy have grown another percent (or 2) each year (compounded) for the past 8 years? Would housing be in the soup in that environment as bad as it is now? Heck, would 9/11 even have occurred in the absence of our ABSOLUTE reliance on the current Saudi regime? (WHOA!! Never mind, that got away from me… politics and diplomacy are not my thing.)

As the saying goes, when it comes to the residential real estate market of American suburbia: “You ain’t seen nothing yet”. If people can't drive to it, or drive to work from it, will it be worth anything? I doubt it.

(Remember, when I speak of these things I mean as they relate to REAL, or constant, dollars. Maybe we should start to price housing versus gold bullion or WTI crude oil – you know, how many ounces of gold or barrels of oil it would take to buy the median home…)

Yours for a better world.

Mentatt (at) yahoo.com