| A REALTOR'S VIEW FROM
HUBBERT'S PEAK:
The End of Cheap Oil
and Cheap Money
by DAVE HOPKINS
Hubbert's Peak is the peak of
global oil production as estimated by the fossil-fuel geologist W. King
Hubbert. At this peak (which could take place in a few years) the
world's oil drum, so to speak, will be half empty, with a lot of sludge
and poor-quality oil at the bottom of the barrel. As the
two-billion-plus Chinese and Indians increasingly drive cars rather than
ride bicycles, the competition for the remaining resources will be
intense. Oil prices will rise, and along with them transoceanic and
transcontinental transport costs for goods of all kinds. Industrial
agriculture, with its diesel-fueled tractors and irrigation pumps and
its petroleum or natural-gas based fertilizers and pesticides, will no
longer be producing cheap food. The petroleum-based plastics that are
ubiquitous in today's world will suddenly no longer have a cheap
feedstock for manufacturing.
Cheap oil and before oil,
cheap coal, have fueled the Industrial Revolution, providing the energy
to drive our economy toward greater wealth and complexity. As
commentators such as James Howard Kunstler have pointed out, even our
so-called postindustrial economy is as dependent on fossil fuels as the
"dark Satanic mills" were in William Blake's day. The globalized
economy, shipping foodstuffs and goods all over the world, is especially
vulnerable. If this becomes no longer viable or practicable, we may have
to rely more on local sources of food and goods.
This, in a nutshell, is the
"peak oil" scenario, the projected consequences of an end to cheap oil. As the possibilities of relocalization and a return to simpler living are played out in the
imagination of peak-oil writers, one skeptic referred to it all as a
"hippie's wet dream"! Who knows, he may be right! It remains to be seen
whether this is yet another Malthusian alarum ringing through the land.
But we do seem to be heading for
an end-game of some kind: the geopolitics of oil in Russia, the Caspian,
Iran, China, Venezuela, Nigeria; the economic growth of India and China;
the reliance of the US dollar and our mortgage markets on Chinese
investment; the ongoing disastrous war in Iraq; fundamentalist Islamist
movements in oil-rich countries that have declared jihad against us for
our military presence in the Middle East; and the overextension of US
power and neoliberal capitalism, which is projecting itself into every
corner of the globe.
How will peak oil play out in
real estate? We'll look at this from three different perspectives:
- First, we need to
understand why real estate has hyperinflated over the past 20 years,
and why we will see property prices deflate as oil and gas prices
soar.
- Second, the broader,
deeper issue of why real estate has been a kind of sink of
value throughout history -- though perhaps a drain of value
is more to the point.
- Third, the effects of
real estate inflation on farmers, and how decreased global trade in
foodstuffs and deflating land values will be a godsend for farmers
and local economies.
PEAK REAL ESTATE
Shortly before Hurricanes
Katrina and Rita hit our Gulf and southeast coasts last August, we
reached, I feel, a peak in real estate values that we will probably not
see again in our lifetimes. For twenty years prior to these storms, we
"enjoyed" a breath-taking inflation in real estate and other assets
(such as the stock market, bonds, etc.). To the point that Americans and
others were eager accomplices in diverting their savings and pension
funds into the aggressive growth of these assets, even accepting
reductions in wages and benefits and defined pensions in favor of stock
options, 401k's, and home ownership with increasingly heavy debt
burdens. Americans felt they owned a piece of this pie, which seemed to
be growing endlessly. Mutual fund managers and even CEOs became heroes
and heroines, while authors such as Ron Chernow wrote books about "the
triumph of the small investor." There was a euphoria in the air (at
least among those who were well invested) that only a few party-poopers questioned.
The reasons given were
similar to those given in the 1920s and earlier still in the 1890s:
global trade, the vastly increased productivity enabled by technology,
advances in communication, and so on. Some even speculated that we had
stumbled into a new era, or had been transported into a new economy.
Well, unfortunately for the
retirement plans of most Americans, these commentators and talking heads
were wrong on nearly every count. The asset inflation of the past twenty
years was, in my view, due to:
- The suppression of wage
inflation by shipping jobs overseas to low-paid countries with
minimal protection for workers or the environment
- The suppression of goods
inflation by importing goods from these same countries
- The low interest rates
of this period were possible because the usual negative feedback of
wage and goods inflation was absent
- Asset inflation (e.g.,
in real estate or stocks) is never
factored in by the Federal Reserve, so then-Chairman Greenspan kept the party
going by lowering interest rates and flooding the market with new
money every time there was a financial crisis
- All this liquidity
sloshing about the world moved into US assets -- the stock market,
bonds, and real estate -- creating the untrammeled asset inflation
we've seen over the past 20 years.
This asset inflation made
many converts among Americans (those who were enriched by it) to the
benefits of neoliberal capitalism (a new laissez-faire capitalism made
possible by globalization), blinding them to its deeply destructive
effects.
How then will our bloated
real estate markets be affected by peak oil?
If we have, indeed, reached
the end of cheap oil, and if increasing competition for the remaining
resources continues to grow, then the price of oil and gas will rise
inexorably. Inflation will spread into every part of the economy
eventually, even into wages. And the Fed, blind though it is to asset
inflation (since it always has worked for Wall Street and not for the
average American), will have to raise interest rates. This will have a
catastrophic effect on the young home-buyers whom Greenspan, just
several months ago, urged to get adjustable rate mortgages, as well as
on Americans who have extracted equity from their homes in the form of
adjustable-rate home equity loans. There will be a slew of foreclosures
and mortgage defaults. The pool of buyers will dry up as interest rates
rise and the economy contracts (increasing unemployment in the process).
So we are liable to see a veritable forest of For Sale signs in our
cities and towns. Real estate prices will drop like a stone, back to
earth as it were.
Another piece of it will be
trade with China. First of all, note that China recycles most of its
US dollar earnings from this trade into US Treasury bonds (funding the
war in Iraq and other government spending) and Fannie Mae's
mortgage-backed securities (China and Japan supply most of the funds for
our mortgages in this country, and the real estate boom would not have
happened without them). So this trade is critical for the projection of
our power abroad and for our asset-driven economy.
As the cost of transoceanic transport of goods from
China rises, reflecting the true cost of fuel oil, and
as China deals with its own internal problems (worker unrest, farmer
revolts, the demand for higher wages and better working conditions,
their deplorable environmental pollution), we may see less trade with
China.
Moreover, if China no longer
has as many US dollars to reinvest in our mortgage markets, or chooses
not to, this will
affect Fannie Mae, the mortgage giant that purchases loans from banks. But by that point, with rising interest rates, the
structured finance and derivatives that Fannie Mae has used so
excessively will have begun to unravel. The US government will do all in
its power to save Fannie Mae, but throwing money at it may not work when
this will further dilute and weaken the dollar.
So the prognosis for US real
estate is pretty bleak, that is, if the peak oil Cassandras prove to be
right.
REAL ESTATE: A SINK, OR
DRAIN, OF VALUE?
I've touched on the causes
for the hyperinflation in real estate over the past twenty years. But
there has always been a tendency, in expanding economies, for land
values to rise much faster than wages -- probably for a similar reason.
Land was valuable from the
beginning because it provided the energy and raw material for living, the
grain most of all, but also the produce, the pasture for meat and milch
and fiber
animals, the wood for crude machines and vehicles and boats and houses.
It was the source of all wealth at one time, so it was only natural that
land ownership played so large a role throughout history in every
civilization.
But as money economies
developed in Europe (15th-16th centuries), Japan, and elsewhere, money
allowed longer and more complex chains of action and trade. Roads and
communications became more important. Debt markets for both states and
individuals came into being. It also became easier to accumulate this
store of value. With the great liquidity of money, prices became more
volatile and there was more money to chase everything: goods, and land
too with all its ancient mystique. The increased liquidity of a money
economy has always sought a ground, solidity, in land. Gold has that
to a lesser extent, but money predated gold and appeared first in the
form of clay tokens representing measures of grain and head of cattle
(literally, "capital"), both land-based resources, like the clay itself.
So, wherever there is a lot
of excess liquidity sloshing around, due to irresponsible or ignorant
central bankers, or spendthrift governments, or excessive borrowing
(which also increases the money supply), it will tend to flow into
sinks such as real estate. There is nothing magical about real estate
as a "safe investment." We are likely to soon learn that lesson.
Asset inflation is
particularly destructive because it is rather like taking the vegetables
and even the straw and vegetable matter and manure from the farmland to
the city and not returning anything to the soil. Ultimately, it depletes
the soil and even destroys it.
Similarly, asset inflation impoverishes our world, depletes our social
wealth, and makes the lives
of most people more careworn and less fulfilling. The concentrated power
of global capital markets, for all its wonderful feats, tends to hollow
out our world in the end. There is no magic or mystery to capital, Fernando De Soto (author of The
Mystery of Capital) notwithstanding. Every dollar of unearned profit
in stocks and real estate leaves a hole somewhere.
In that sense, then, real
estate (and the financial markets) are more a drain of value than
a sink of value.
A MORE DOWN-TO-EARTH
REAL ESTATE
Henry George, writing his
fiery treatise on land economics, Progress and Poverty, a hundred
years ago, saw the effects of machinery on the concentration of land
ownership in England and in the Great Plains of our country: "The steam
plow and the reaping machine are creating in the modern world
latifundia [great landed estates in Imperial Rome] of the same kind
that the influx of slaves from foreign wars created in ancient Italy."
That is, the power of steam, or coal at that time, was like the energy
of hundreds of human slaves, displacing the small, independent English
yeoman, with the beginnings of agro-industry. Fossil fuels gave
agro-industry its impetus, too, in the tractors and irrigation pumps and
forced farming of the Great Plains, which created the Dust Bowl of the
1930s. And later, after World War II, the influx of petroleum-intensive
fertilizers and pesticides and other diesel-fueled farm machinery tended to
concentrate ownership of land and to treat both land and food animals as
the raw material of a factory.
The purpose was to wrest as much value as
possible from the land, which was now a dead soil without the living
organisms that bring a soil to life and create nutrients. Indeed, the
effects of capitalism can be seen most clearly in industrial farming and
the industrial food chain---the externalization of costs that create
unhealthy food, unhealthy animals and unhealthy consumers; a depleted
soil; diseases fomented by monocultures; aquifers polluted or drawn down
to unsustainable levels; toxic runoff into streams and lakes; hybrid
varieties of vegetables and fruits created not for their taste or
nutritional value but for their transportability and adaptation to
machines; and the terrible impersonality of the entire process (the
growing and eating of food of all things!). Once you internalize those
costs and create a responsible money system, all the vaunted profits
suddenly evaporate.
In industrial farming, then,
land had become another resource to squeeze dry, even as the mystique of
land ownership grew for an uprooted modern America. It was wondrously
easy to exploit this nostalgia in the early suburban developments of the 1920s.
The names still linger, all bucolic or reminiscent of English manors and
country estates.
But for the farmer, it posed
a more serious challenge. Debt incurred by the purchase of machinery;
low prices for his produce due to long-distance shipment of foodstuffs
and huge factory farms;
pressure from developers; the grind of working a farm without sufficient
help; the lack of interaction with the soil, the animals or his
consumers.
Yet the aftermath of peak oil
could change things quite dramatically for small farmers, especially
organic farmers interested in marketing their produce and meat in nearby
markets or at the farm gate itself. With the high cost of oil, you may
see more draft horses and less debt from the purchase of expensive
machinery. The cost of shipping foodstuffs cross-country or around the
world will be prohibitive and this will allow prices to climb to their
natural level. Lower land prices will make it feasible once again to
expand pasture land or cropland. Then there is the joy, too, of interacting with the
people benefiting from your labors, as well as with the land and with
your animals.
Farming should be the base of
any humane economy. In the more localized economies of the post-peak
future (if this scenario plays out), food and the productivity of the
land will once again become the main source of value in land. And real
estate will, at long last, come
back to earth.
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