PropertyInvesting.net: property investment special reports: 238: Oil, Cars & Real Estate

238: Oil, Cars & Real Estate - what we'd do if we were Pres. Obama

11-23-2008

PropertyInvesting.net team

The new President of the USA - Obama - has an amaizing opportunity to boost the US economy - "out with the old and in with the new". We at PropertyInvesting.net held a "Think Tank" session to try and determine the types of policy that would create the most economic value medium to long term for the USA. And also boost security and lower business risk. As business people, investors - we believe the following policies should be adopted:

Oil Imports: Target reducing oil imports by 100% (or 8 million barrels a day) in 10 years by:

Agreeing to bail out GM, Ford and Chrysler ONLY if they agree to develop, supply and market 50% of all cars as electrically powers within 5 years - and 75% after 10 years
Restrict car and truck engine size to 2.5 litres (or 30 mpg) - try and make incentives for more efficient petrol and diesel engines (with low pressure turbos, super-chargers, and finer tuning)
Open up remaining areas for oil extraction to boost indigenous oil supply - and prevent further declines in oil production (currently 2% a year, 5 million barrels)
Increase investment and incentives for wind power (in the mid West)
Increase investment and incentives for sea algal bio-diesel production
Increase investment and incentives for solar power
Do a deal with Canada on joint venture of heavy oil extraction
Tax all cars based on their weight - to provide incentives for efficient car usage (as the Dutch do)

If oil imports can be stopped all together, then at $125/bbl, $700 billion a year would be saved - that's a massive 5% of GDP. It would be equivalent to giving everyone a net 5% of their income into a savings-investment account each year from now onwards. That's $2,000 per person per year! Massive. And it would put an end to all Middle East, Venezuelan and African oil imports - so whenever the oil price went up - it would have a neutral effect on the US economy. An end to other countries making economic threats.

We believe the global economy was set into a downward tailspin starting June 2007 when oil prices rose above $70/bbl. The US economy cannot afford prices above this level. In 1999, oil prices wer $10/bbl. $70/bbl was a seven fold increase. As prices approached $147/bbl - inflation started to kick-in - not surprising, and interest rates rose, people became stretched, sub-prime, over-leveraged banks and hedge funds got into trouble then the whole pack of cards came tumbling down. Investors were then forced to sell their oil and mining holding because they needed the cash for cash-calls.

Far too much US money has been expended on trying to improve Middle East security - this has had little effect on either oil supplies to the USA or oil prices. It's been money out - in a hugely value destroying way. If this money had been spent on weaning the USA off oil, the economy would probably be in pretty good shape now. Instead, the oil price spiked and - just like in 1971, 1981 and 1991 - this caused a recession. Same old story.

Now this new government MUST do something about it - an economic crisis has occurred and it's time to get tough - to convince the American people that big gasoline burning trucks are causing recessions and put a huge risk to the US economy as the oil supply-production peaks. Yes - Peak Oil is just around the corner. In fact, we believe we will never produce more oil per day than we did in Jan 2008.

As we have reported from our detailed bottoms-up modelling of each country's oil supply and demand, we believe the world is now bubbling along an oil production plateau - with very little room if any for increases in oil production. The "Doubting Thomas's" may point to oil crashing to $50/bbl. We say - this is temporary - because of short term demand destruction and the popping of a massive speculative oil commodities bubble (caused in part by hedge funds with leveraged bets on oil rising). But as oil prices stay at $50/bbl - oil production projects will be cancelled or delayed - and this will sow the seeds of the next big supply distruption - lack of supply to meet demand - probably in about 18 months time as the global ecoomy comes out of recession. Banks will be reluctant to fund oil projects - thinking they are too risky. In any case, the banks are short of cash. The underlying issue has not gone away. If anything, this temporary crash in oil prices will increase the oil decline rates as investment is slowed and when the demand increases again - they'll turn on the taps - and nothing will happen! Like putting your foot down on the accelerator of a car that has its engine flooded. No response. Oil prices will then rise again, economies will slow, then economies will again get into trouble and the whole cycle will start again. Possibly as early as mid 2011.

Basically - low oi prices boost western economies. High oil prices acts as a huge tax. If oil is at $50/bbl - the USA economy should start growing again. At $147/bbl - it will drive it into recession. This does NOT have to be the case - if oil imports could be ended by switching to electric cars (power by indigenous coal burning power plants, wind and solar) and algal bio-diesel - the all of the USA's energy demands could be supplied within its country boundaries. This would save about $700 billion a year - the same as the Fed's entire bail-out funding plan for the biggest recessionary threat in a quarter of a century.

As Obama - and your aids - it's time to start acting now - before Peak Oil hits and it's too late. Use this crisis to drive through change. Do not let Ford, GM and Chrysler repeat their mistakes - switch to efficient electic cars - make sure the oil companies can help provide the infra-structure (possibly in return new US oil leases - as offset bonuses for putting in electric power into all gas stations).

And finally, for real estate investors - low inflation, low interest rates, higher disposable income and stronger economic growth all lead to - higher house prices, higher rentals, and more healthy residential and commercial real estate business. It would also likely help reduce harmful pollution and CO2 emmissions if done properly (boom in wind, solar, algal bio-diesel, clean coal, CO2 sequestration, possibly nuclear power etc).