The Twin Bubbles : Housing and Oil

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The Twin Bubbles Housing and Oil
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Contents
The Twin Bubbles
Housing and Oil
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History and Introduction

• Since the unprecedented crash since the Great
  Depression 1929, the next crash did not arrive
  for 44 years.
• Then, in 1973, there is a turning point in
  economic and social annuals of the U.S.
• OPEC (oil cartel) imposed an oil in the U.S. and
  the rest of the world.
• As a result, oil price jump has never fallen to
  the previous level again.

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History

• Oil price jump during 1973 was not the result of
  consumer euphoria (normally the bubble stems from
  the demand side due to consumers the
  irrationality)
• In fact, the demand for oil decline after 1972
  but oil supplier has been shrinking.
• Oil price jumped from 2.50 to 42 per barrel
  (1,600 per cent)

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Effects
History and Introduction
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Demand Supply-side bubbles
Rule of demand and supply
And the three-part life cycle of bubble
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Housing Bubble
When Black Monday, Alan Greenspan , head in
Federal Reserve, unraveled the crash by using
the action causing interest rate declined.
14 years later, he followed the same recipe for
disaster Control and began trimming the Federal
Funds Rate
The Federal Funds Rate (the interest fee that
bank charge each other for overnight loans, then
when this rate fall, other interest rate usually
follow) fell from 6.5 to 1
However, Greenspan became award of the phenomenon
but dismiss it as a little froth in this market.
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The stages of cut interest rate
Why is low interest rate scary?
Most of buyers purchase home via credit
When demand for house rises, price goes up
Low interest rate, low cost of borrowing
It contributes to higher demand
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Data of housing
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Speculators action

• Because sinking interest rate, home demand has
  expand smartly since 2001, residential output has
  grown accordingly (2004 2005 2 million housing
  units were built and similar 2006).
• However, the population increase can only support
  an increase of 1.5 million units. That means
  500,000 is snapped up by speculator- who buys
  them not to live but to make money from
  speculation.

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Effect on the world
It spreads to other countries
The worldwide rise in home price is the biggest
bubble in history prepared for the economy pain
when it pops. It will froth from America,
Britain, Australia to France, Spain, and China
Home values in the advanced economies of Europe
North America has already climbed more than 30
trillion in the new millennium, property
value surpassed GDPs of nation. Home price is
very soared
From the Home Price Indexes in the Britain,
Britains balloon is the largest home value
jump of 154 between the years 1997 2005,
France is 87, Netherland is 76 and U.S. is next
with a jump of 73.
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The bubbles direction
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Oil Bubble
Stages of bubble
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Oil bubble from supply-side
Monopolistic trigger does not come from OPEC
It stems from Big Oil Company
Conoco Phillips
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Hurricane Katrina
During September and October, the Gulf of Mexico
was hit by Hurricane Katrina and Rita, several
refinery and natural gas platforms were battered.
Oil and gas production fall sharply and not
surprisingly, energy prices soared, with gasoline
to 3 million per gallon and natural gas to as
much as 14 million cubic feet. And crude oil
jumped to 70 per barrel. The post- Katrina, by
March 2006, crude oil was down to 63 per barrel,
gasoline averaged 2.30 per gallon and natural
gas to 7. This is because demand fell due to a
warmer-than-expected winter. Now the question is
why did natural gas prices sink more than 50
(14-7), while petroleum gas, especially crude
oil, barely budge?
Answer the economic power in natural gas (60)
is not concentrated as petroleum production
(21). Therefore, when energy demand fell,
natural gas prices fall much faster than
petroleum prices. Where there is little
competition or excessive concentration , as in
oil industry, the law of demand and supply still
work but very sluggishly.
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Effects
Five Bully controlling over 60 of refinery output
Their profit is 298 billion
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Hedge Funds
Action of speculators for profit
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Wall Street and avaricious behavior
Action of speculator
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Again, hedge funds is one reason causing crude
oil is now so expensive even though there is no
physical shortage of oil anywhere in the world !!
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Punishment

• Oil companies themselves are speculating
  and manipulating the future market. This is Bill
  OReilly reported on his show
• A few months ago, I received some critic for
  telling you that the big Americans oil companies
  are price gouging. You should have seen my mail.
  Well, I was right, and heres the proof. The U.S.
  commodity futures Trading Commission just fined
  Shell oil 300,000 for manipulating crude oil
  market. So, now oil bullies have found another
  way to shift people through speculation.

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Conclusion !

• Twin bubble Housing and Oil crisis in the new
  millennium
• Causes Supply- side and Demand side
• Demand -Side stems from the irrationality of
  consumer(decline in Fed Fund Rate contributes to
  increase consumers demand), speculator
• Supply-Side stems from the monopoly power
  (OPEC,1973 and Big Oil company,2004)

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Illustration of whole picture
Its clear that oil market is bubble
1973
1982
2004
Then,
Oil bubble stems from monopolistic trigger by
OPEC cartel by trimming the output
Oil bubble is punctured as a sign of burst and
then price steady decline
There are mergers act as monopolist and they
cornered causing oil price jump and accompanied
with speculation
Oil bubble displays mixture of both supply and
demand-side
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A rare phenomenon, the ruptures
perils are magnified!! That is the crucial
juncture where we stand today, and the resulting
explosion could be brutal in the near future
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Lead to futures pain
The Twin Bubbles
Housing and Oil Crisis
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Thank You !