Something Had to Give: How Oil Burst the American Bubble

Posted by Bulatlat
Vol. VIII, No. 2, February 10-16,2008

The economic bubble that lifted the stock market to dizzying heights was sustained as much by cheap oil as by cheap (often fraudulent) mortgages. Likewise, the collapse of the bubble was caused as much by costly (often imported) oil as by record defaults on those improvident mortgages. Oil, in fact, has played a critical, if little commented upon, role in America’s current economic enfeeblement – and it will continue to drain the economy of wealth and vigor for years to come.

The great economic mega-bubble arose in the late 1990s, when oil was cheap, times were good, and millions of middle-class families aspired to realize the “American dream” by buying a three (or more) bedroom house on a decent piece of property in a nice, safe suburb with good schools and various other amenities. The hitch: Few such affordable homes were available for sale – or being built – within easy commuting range of major metropolitan areas or near public transportation. In the Los Angeles metropolitan area, for example, the median sale price of existing homes rose from $290,000 in 2002 to $446,400 in 2004; similar increases were posted in other major cities and in their older, more desirable suburbs.

This left home buyers with two unappealing choices: Take out larger mortgages than they could readily afford, often borrowing from unscrupulous lenders who overlooked their overstretched finances (that is, their “subprime” qualifications); or buy cheaper homes far from their places of work, which ensured long commutes, while hoping that the price of gasoline remained relatively low. Many first-time home buyers wound up doing both – signing up for crushing mortgages on homes far from their places of work.

The result was metastasizing exurban home developments along the beltways that surround major American cities and along the new feeder roads that now stretched into the distant countryside beyond. In some cases, those new homeowners found themselves 30, 40, even 50 miles or more from the urban centers in which their only hope of employment lay. Data released by the U.S. Census Bureau in 2004 showed that virtually all of the fastest growing counties in the country – those with growth rates of 10% or more – were located in exurban areas like Loudoun County, Virginia (35 miles west of Washington, D.C.) or Henry County, Georgia (30 miles south of Atlanta).

At the same time, cheap oil and changing consumer tastes – pushed along by relentless advertising campaigns – led many of the same Americans to trade in their smaller, lighter cars for heavy SUVs or pickup trucks, which, of course, meant only one thing – a significant increase in oil consumption. According to the Department of Energy, total petroleum use rose from an average of 17 million barrels per day in 1990 to 21 million barrels in 2004, an increase of 24% – most of it being burned up on American roads.

Let the Good Times Roll (into the Exurbs)

In 1998, when the bubble was taking shape, crude oil cost about $11 a barrel and the United States produced half of the petroleum it consumed; but that was the last year in which the fundamentals were so positive. American reliance on imported petroleum crossed the 50% threshold that very year and has been rising ever since, while the cost of imported oil hit the $100 per barrel mark this January 2 for the first time, an all-time record (though the price was once briefly higher, as measured in older, less inflated dollars).
When that steady price climb, combined with growing dependence on imported petroleum, was translated into the new exurban landscape the economic bubble began to shudder. As a start, there was that ever-increasing outflow of dollars needed just to pay for all those barrels of crude and the resulting surge in America’s foreign-trade deficit.

Consider this: In 1998, the United States paid approximately $45 billion for its imported oil; in 2007, that bill is likely to have reached $400 billion or more. That constitutes the single largest contribution to America’s balance-of-payments deficit and a substantial transfer of wealth from the U.S. economy to those of oil-producing nations. This, in turn, helped weaken the value of the dollar in relation to key foreign currencies, especially the euro and the Japanese yen, boosting the cost of other imported foreign goods and so threatening to fuel inflation at home.

Meanwhile, two critical developments kept the cost of oil rising: a dramatic increase in global demand, largely driven by the emergence of China and India as major consuming nations; and a pronounced slowdown in the expansion of global supply, due mainly to a dearth of new discoveries and recurring political disorder in key oil fields already in production. This meant that American energy consumers – including all those long-distance commuters with crippling mortgages and gas-guzzling SUVs – had to compete with newly-affluent Chinese and Indian consumers for access to ever more costly supplies of imported petroleum. Something had to give.

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