Oil Prices Slip Sliding Away

I think in many respects being an economist means you look at things the same way an urban planner does but with a much longer time horizon. A planner thinks about what initiatives make the city better today. An economist thinks about what is happening now that will affect what the city will look like, but much further into the future. I have been amused by the national punditry that keeps talking about how great it is that oil prices have declined (a polite word when in fact prices did what David Caruso did when he left the show NYPD Blue, only to return reincarnated with a smaller ego many years later). This price drop has the potential of giving a number of consumers some benefit in lower costs and higher potential pricing power, assuming of course the newly found income isn’t being spent on health care, food costs or underwater mortgages. To suggest in some odd way the people are going to run amok buying stuff now that a tank of gas is $20 bucks cheaper is just absurd. The vast majority of consumers are over extended, many have heavy student loan or credit card debt and some still have houses that are under water. (For those in foreign nations reading this, under water means the government convinced them to buy a house with artificially inflated interest rates that they couldn’t qualify for at the blackjack table in Las Vegas).

If there is a benefit to the debacle in oil pricing, who pays the cost? You don’t hear much about that but economically we all do, just not right away. Between the probable loss in employment in the energy states, mostly shale but other forms of energy including WTI (West Texas intermediate) and North Sea Brent mid-stream, jobs will be lost, production scaled back and the engine that is an important part of GDP will halt. Energy has better prospects as demand grows and returns in the future than it does today. Worldwide, not just in the United States. Dropping oil prices are destabilizing Russia, which isn’t a good thing even on a good day. We can’t as a nation afford to play dictator roulette when the current shallow end of the gene pool already gave us Putin and that nut job in North Korea. Maybe somebody should make a movie about that…

The apartment industry indirectly uses a lot of energy and will doubtlessly start hearing residents justify their request for lower lease renewals because energy is cheaper. If it wasn’t for the vastly overinflated underwriting that most properties are suffering through, the renters might have a point. Sadly for renters and good for owners, lower energy costs mean greater returns and the real prospect of boosting long-term values. While this doesn’t mean huge increases in pricing power, it does for the moment, especially in seasonal markets, mean Santa came early. So for those who had sufficient guest parking for the sleigh and no local regulations or complaints about hooves and bell noise levels, it’s safe to assume the first quarter, at least coming up is looking pretty good.

Jack Kern is the research editor of Multi-Housing News and Commercial Property Executive. An avid fan of Fed policy proceedings and markets he is frequently spending time evaluating current economic releases and writing about long-term trends, rent impacts and the upcoming unintended consequences of actions.