It's The Crude, Dude!

QUESTION: what do North-American real				(another unreliable organization in large part
property owners have to do with the Middle East				financed by America).
conflict? ANSWER: everything and anything they				Oil is essential to the economies of the
can possibly imagine.				industrialized world, at least for now. Yet it is a
Fluctuations in the world economy are largely				finite resource, and there is less of it in the Earth's
driven by confidence. A changing level of public				crust than the general public probably wants to
confidence is the ultimate driver behind much of				realize. We have at least enough to last for
the variation in individual and national incomes, in				another few decades - although that is not a huge
employment rates, in corporate earnings, in				amount of time, considering how central oil is to
interest rates and in many other measures of the				our lives. Furthermore, while we are not about to
world economy. All the more so when nations,				run out of oil, we may soon run out of cheap oil.
and indeed entire continents, are as economically				That is, oil which can be pumped out of the
intertwined as nowadays. In these times of				ground without great difficulty, and that therefore
globalization, the political-economic policies of the				can be brought to markets at the sort of prices
European Union, for good or bad, are exported to				we have become accustomed to in recent years.
North America. Unrest in China or a terrorist				In the coming decades, we can expect an
attack in Mumbai are reflected in the public				intensified international competition, even military
confidence of financial and investment markets. A				rivalry, over the increasingly valuable remaining
more and more despotic and dictatorial Putin has				reserves of cheap oil, most of which are located
the effect of altering the commodities markets				in the volatile Middle East.
by undermining investors' confidence worldwide.				In light of this geopolitical and economic context,
But there is nothing, nothing at all short of another				naturally one might expect a relation between oil
September 11 disaster that works so much as an				and house prices, since high oil prices tend to
impediment to financial and real estate markets in				damage the economy and hence people's ability
North America than a conflict in the Middle East.				to pay for their homes. They also raise the cost
And this week's attack of Lebanon on Israel is				of heating a home. There ought to be at least
yet another proof of it. Just take a look at the				some relation, since an oil price boom can create
dive of the Dow Jones of these past few days.				a recession, and recessions tend to be bad for
Just take a look at the spike of the price of				housing markets.
crude. To be sure, it is not so much the Lebanese				An examination of oil price behavior in recent
or Hizbollah per se that kill investors' confidence in				decades indicates, in general lines, that oil prices
North America. Afterall the Lebanese or Hizbollah				rose abruptly between 1973 and 1974, during the
are, taken all and by themselves, nothing more				first oil crisis thanks to the supply squeeze by
than a bunch of ignorant, fanatical boors. But it is				OPEC, the oil-producers' cartel. Oil increased again
what's behind them that worries Capitalism.				between 1979 and 1980, during the second oil
It's the crude, dude!				crisis, due to the Iranian revolution and the
There is a very specialized field of Economics,				Iran-Iraq War. Overall, oil has remained an
known as 'Behavioral Finance', which applies				expensive commodity since 1974. Starting in
scientific research on human and social cognitive				1998, with a brief interruption in 2002, oil prices
and emotional biases to better understand				have increased four-fold. Many have attributed
economic decisions and how they affect market				this to demand from fast-growing developing
prices, returns and the allocation of resources.				markets like China and India. Moreover, there are
Behavioral Finance is the heart of Capitalism, the				fears that, as this growth continues, China and
pump that moves money worldwide. To better				India will make even more extraordinary demands
realize how important is Behavioral Finance, one				on natural resources like oil. These fears have
must understand that one of the tenets of				pushed prices even higher.
Capitalism is that democracy has significant				Unlike stock prices, which change randomly, house
indirect effects which contribute to growth.				prices are governed by 'momentum' and
Democracy is associated with higher capital				sentiment. Therefore, given the recent rises in
accumulation, lower inflation, less political instability,				real estate values and assets appreciation, one
and greater economic freedom. Anytime				might expect further increases later on, even
democracy is threatened either by war, terrorism				though at present many real estate markets
or unwarranted attacks to free and soverign				have fizzled out. However, the oil price boom
countries, even in places as far away as the				could threaten the world economy, thus bringing
Middle East, Capitalism grinds to a halt. Capitalism				with it the end of the housing boom. The ascent
abhors the uncertainty created by political				of oil price, due especially to the voracious energy
instability.				appetite of India and China and coupled by the
This particular concept is very clear to the				instability in the Middle East, is generating a
'Masters of Capitalism' - all the American				resurgence of public fears about the oil markets.
Administrations since the end of WWII. And of all				The sudden public recognition that there could be
places on the planet, no one is as important to				binding resource constraints as emerging countries
Capitalism as the oil fields of Islam. This is the				develop, may very well encourage potential oil
reason for American direct political involvement in				suppliers to hold off on development so that they
the Middle East since mid-1947, following the				can sell at higher prices later on. This fact in itself
departure of Britain from Palestine and the				has the potentiality of creating higher prices
creation of the State of Israel. This is also one of				today, sparking a prolonged speculative oil bubble
the key reasons behind Washington's intervention				that can spell real trouble for the stock and
in Iraq - to take control of that country's massive				housing markets.
oil resources. Controlling the region in order to				Indeed, the risk of such an oil bubble can be the
ensure US access to its ample oil resources has				biggest threat to the world economy - if not now,
been one of the key features of American				in the coming years. There is even a danger that,
foreign policy for decades, dictated in large part				instead of looking at ways of reducing
by Arab flimsiness and unreliability. And in light of				consumption or for alternative sources, we will
this policy, a strong, powerful and nuclear Israel				become transfixed by the risks of high oil prices
has been and is the best sentry America can				to an increasingly competitive world economy.
have in the region. Thus the USD 4 billion plus that				It is clear now, therefore, how relevant is the
America shells out to Israel annually in loans,				stability in the Middle East to real estate markets
grants, financial aids and military armaments, as				in North America. As I said before ... It's the
well as the political support at the United Nations				crude, dude.

Democracy

It's The Crude, Dude!