The conflict in the Middle East highlights how even though Tehran and Oklahoma City are almost 7,000 miles apart, our interconnected world impacts us all, everywhere, almost immediately. The power of global markets is astounding. While the US produces more than double the amount of oil today than it did 25 years ago, the conflict, 7,000 miles away, has caused oil prices to jump 36% in just 2 months. Global supply disruptions cause prices to spike, not unlike the supply disruptions we experienced during COVID and the Russia-Ukraine war.
No individual, politician, country, town, leader, etc has the power to truly overcome the real power of global markets and pricing. Why would I bring up the subject of oil in a real estate column? A spike in oil prices usually fuels inflation. When transportation costs more, prices go up. The more they rise, the higher inflation. When inflation rises, so too do interest rates.
Americans consume anywhere between 350-650 gallons of gasoline per year, per driver. There are approximately 284 to 291 million registered motor vehicles on the road in the US, including cars, trucks and buses. This is how much oil impacts our world in real estate/housing:
1. Rising oil prices drive up costs for petroleum-derived products like asphalt (often 0.7% increase for every 1% in oil prices), insulation, plastics, and transportation of heavy materials.
2. Higher oil prices raise diesel and gasoline costs for shipping materials to sites, adding surcharges to deliveries.
3. Heavy machinery, generators, and site vehicles become more expensive to run, increasing daily operational expenses.
4. The combination of increased costs and supply chain strain can lead to project delays and budget overruns, with some reports noting 5-10% rises in total project costs.
5. Higher oil prices that fuel inflation fuel financing rates that are often an additional cost added to the price of goods and services.
Even though we are producing substantially more oil than ever before, the pricing is controlled globally, not unlike lots of pricing during the post-COVID era. OPEC also contributes to this as they control production, raising output when prices are high and dropping them to fuel pricing. A cartel with inventory control not unlike the old diamond industry. OPEC only recently restored production to 2019 levels and was directly part of the oil price surge that cost the world billions and reduced housing affordability.
