LOGO The Twin Bubbles : Housing and Oil
May 10, 2015
LOGO
The Twin Bubbles : Housing and Oil
Contents The Twin Bubbles
Housing and Oil
1. History and Introduction
2. Housing Bubble
3.Oil bubble
4. Hedge Funds
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.
History
Oil price jump during 1973 was not the result of consumer euphoria (normally the bubble stems from the demand side due to consumer’s 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)
Nine years later, oil price began fall. By 1986, it’s less than $10 per barrel but it’s not hold to the same level
Oil balloon is a result of the monopolistic action of the cartel (OPEC) that trimming the oil output (embargo)
Oil bubble1973 - 1982
History and IntroductionEffects
Form swiftly
Expand fast
Burst
Demand-side
Its demand outpaces its supply. It stems from the obsession of buyer.
Supply-side
Its supply falls short of demand. It stems from market concentration or producer’s manipulation
Interplay
Bubbles tree-part life cycle
Rule of demand and supply
And the three-part life cycle of bubbleDemand & Supply-side bubbles
Housing Bubble
1987
2001
2002
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 disasterControl 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.
Most of buyers purchase home via credit
Low interest rate, low cost of borrowing
It contributes to higher demand
When demand for house rises, price goes up
Why is low interest rate scary? The stages of cut interest rate
1
Between 2001 to 2005, home values had been appreciated 53% nationally in a slow-growth economy but it’s faster than the national wide figure. The report in 2005 shows that alone home price rise to 13.5% that is the fastest pace since 1979.
3
In record numbers, people have been using their home appreciation as vehicles for maintain their lifestyle. They refinanced their mortgage and taken equity out of their homes and used money to consume. So, the nation is sinking in an ocean of debt.
2
1975 – 1995, home price jumped 204% while inflation is 183% - not far from the inflation rate. it surpasses the CPI inflation rate. 1995 – 2000, inflation adjusted rise in home prices was 3% per year but soar 9% per year for 2000 – 2005. Clearly, home values have substantially accelerated in the new millennium.
Data of housing
www.themegallery.com
Speculator’s 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.
Effect on the world
AROUNDAROUND THETHE GLOBEGLOBE
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, Britain’s 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%.
The bubble’s direction
Nature of bubble
Spread
Burst
expand
Form
www.themegallery.com
Oil Bubble Stages of bubble
Experts expect no fall in price
Price is predicted to rise
People think it’ll go on
No one recognize until it burst
People foresee it keep rising
Hedge funds prevail
Continue to rise and keep durable
Price jump persist several years
Oil bubble from supply-side
They are the bullies profiteering from the self-generated oil bubble.
oil mergers has raised the pump price at least 10 cents a gallon
the crude oil price as much as $10 per barrel
Big Oil controls over 60% of gasoline production
and 21% of natural gas
Exxon Mobil
Royal Dutch shell
Chevron – Texaco
British – Petroleum – Amoco-Arco
Monopolistic trigger does not come from OPEC
It stems from Big Oil Company
Conoco – Phillips
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.
Effects
The uncompetitive practices by oil corporations are cause – not OPEC or environmental law – of high gasoline prices around the country
Why did crude hit $78 in July 2006 without a divesting hurricane? The answer comes from the monopolized oil industry along with another factor next.
Bubble
Five Bully controlling over 60% of refinery output Their profit is $298 billion
Hedge Funds
Big Oil Keep persisting Speculation
Five Bullies Price Rise Hedge Funds
Action of speculators for profit
Wall Street and avaricious behavior
1990
Then, crashS
tock Market
2000
Go to oil m
aniaB
ig money
Then
SuperspeculationThere is
2004
$245 trillion(31.8%
)
OTC
grew
Action of speculator
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 !!
Punishment
Oil companies themselves are speculating and manipulating the future market. This is “Bill O’Reilly reported” on his show :
“A few months ago, I received some critic for telling you that the big American’s oil companies are price gouging. You should have seen my mail. Well, I was right, and here’s 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.”
www.themegallery.com
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 consumer’s demand), speculator
Supply-Side stems from the monopoly power (OPEC,1973 and Big Oil company,2004)
Illustration of whole picture
1973 1982 2004 Then,
Oil bubble stems frommonopolistic 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
It’s clear that oil market is bubble
www.themegallery.com
A rare phenomenon, the rupture’s perils are magnified!! That is the crucial juncture where we stand today, and the resulting explosion could be brutal in the near future
Lead to future’s pain
Big oil
Oil Bubble
HousingBubble
Fed Funds RateSpeculation
Economic Chaos
The Twin Bubbles
Housing and Oil Crisis
LOGO