Economic Commentary

$100 Oil and What It Could Mean

In the past two weeks we presented a debate regarding the strength of the real estate market during this coming year. However, we left one major factor out of the equation. That is the price of oil. Late last month, oil crossed over the $90 per barrel mark and that means gas at the pumps also crossed over the $3.00 per gallon level. Certainly higher gas prices represent bad news for the consumer. But, what would the price of oil have to do with real estate? Higher oil prices right now are indicative of higher demand caused by a recovering economy. The same recovering economy that will help the real estate market. In this sense, a strong market for oil is good news for the fortunes of real estate. However, all the news is not good.

If oil indeed does approach $100 this year as many analysts are predicting and gas prices start approaching $3.50 per gallon, this will have a negative effect upon consumer spending. The consumer will have to spend more of their available dollars on gas and other energy-based expenditures such as utilities. This would give the consumer less money to spend elsewhere. The result? Higher energy prices may be a result a stronger economy, but they can also slow an economy down. Furthermore, higher energy prices contribute to higher inflation which can then cause higher rates, causing another drag upon economic growth. Oil prices can even affect the pattern of real estate growth, making long commutes more expensive and favoring real estate that is closer in to population centers. Are higher oil prices a certainty? Most analysts believe oil will continue to advance as long as the economic recovery does not stall. If they are right, we need a gradual, orderly advance so as not to adversely affect the pace of economic growth this year. The latest employment statistics, including a recent jump in first-time claims for unemployment, advances evidence of continued slow growth. Of course, jobs data can be extremely volatile from month-to-month.

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