A recent article in Fortune warns against celebrating falling oil prices. After pointing out the obvious immediate benefits to consumers, the piece points out:
[F]alling oil prices also suggest that the recession the U.S. has so far avoided is well on its way, as consumers pull back from the spending spree that drove economic growth earlier this decade. A weakening economy will mean more layoffs, further pressuring already reduced spending.
The article also manages to connect falling oil prices with falling North American demand:
Perhaps the biggest factor behind the recent 18% drop in the price of a barrel of crude is sinking North American demand. Federal Highway Administration data show the number of miles driven in the U.S. dropped from year-ago levels for the seventh straight month in May.
Aside from debunking the exceptionalist fantasy that North Americans drive because it's in our blood rather than because it's cheap and convenient, this suggests that the drop in oil prices is largely illusory: if we need a recession to make driving affordable, there's something wrong with the underlying transportation model.
At the same time, the Big Three automakers continue to struggle with herculean quarterly losses as consumer demand for bloated SUVs collapses, to the extent that the prospect of bankruptcy can no longer be dismissed.
Credit rating firm Standard & Poor's cut GM and Ford deeper into junk bond status last week, leaving their debt just barely above the level normally associated with firms at significant risk of near-term default.
The automakers are struggling to reposition themselves, with smaller, more efficient vehicles and more competitive cost structures, but these strategies will take years to play out.
In the meantime, the overall energy situation will continue to tighten. The Big Three may well discover that by the time they adjust their products for $100 oil, they're stuck trying to sell in a market with $200 oil.
Despite the recent drop, energy prices are still very high in real terms. It's bittersweet at best to observe relief over an oil price - around $120 a barrel - that would have produced howls of pain just a year ago.
An alarming NY Times article from yesterday suggests that home energy prices this coming winter will "far exceed those of last year."
Even after a precipitous decline from its peak in early July, the price of natural gas is still 11 percent above where it was last winter.
Heating oil is 36 percent higher, with the government projecting that the costs of both fuels will stay high. Electricity prices are also up moderately.
Prices have become so volatile that energy retailers are now reluctant to offer price protection plans, meaning that consumers will be on the hook, month to month, for unpredictable heating bills.
Load that on top of the existing pile-on of flat wages, increasing layoffs, higher transportation costs, falling property values, ongoing foreclosures, tightening credit markets, and rising inflation rates.
The WSJ article reads:
In the past year, roughly 15% to 20% of residential developers have gone out of business, suspended operations or changed their line of work, according to an estimate by the National Association of Home Builders.
Canada mostly escaped the real estate mania, and so far it has mostly escaped the real estate collapse as well. However, the premise on which most of our new residential developments over the past several decades have been planned is still highly vulnerable to the forces shaping the global economy.
Many of today's suburbs may will turn out to be tomorrow's slums when it becomes too expensive to drive everywhere. The worst thing we can do in response to falling oil prices is ease back into our old habits of single use zoning and car-centric transportation.
Instead, we should snatch the opportunity to invest in more sustainable land use while we still have the wealth to do it.
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