Monday, June 9, 2008

Some thoughts on oil

Robert Reich sums up some basics regarding oil prices - rising global demand (India, China), Middle East unrest (Israel, Iran), speculation and a rising bubble in the oil market, decline in the US dollar. Of these, I expect two to sort themselves out eventually - the oil bubble will burst (although I have zero idea how long that will take), and the US dollar will strengthen (again, eventually).

Reich sees gas dropping to $3.50 within a year. I wouldn't be surprised if it dropped lower (or faster) than that - the media always freaks out when oil and gas prices rise, and its always a bit overblown in terms of how long and how brutal it will last. But, the Middle East will most likely be a mess for quite some time to come, and India and China are going to keep growing in size and affluence. So, I think Reich is generally correct when he says:
Bottom line: The days of cheap energy are over, folks. Gas may go down to $3.50 a gallon by this time next year, but you'd be wise to trade in your SUV for an economy car. And you'd be wise to avoid building that new addition to your home and put the money instead into better insulation.
That got me thinking about how expensive energy costs will affect real estate. In the 70's, you saw lots of buildings built with low ceilings to conserve energy. Now-a-days, high ceilings are a must in new construction projects, whether it's retail, or a vaulted ceiling in the kitchen, or 10' ceilings in a new soft-loft multi-family building. All that space is expensive to heat and cool, and much like gasoline, you can't change your usage too much in the short term. You can drive less, or you can turn the temperature down a few degrees. But homeowners take it on the chin when energy prices go up. Does anyone remember how everyone freaked out two winters ago when natural gas prices skyrocketed in Georgia?

Will we see demand for smaller, more energy efficient spaces come back? Certainly green building trends will increase - they are already on the rise, and saving energy is the primary financial driver for this (as opposed to the warm and fuzzies you get for 'living green'). I think gas prices are already driving demand to in-town neighborhoods, although the credit crunch has stalled a lot of that movement.

But I hope that this increase in energy prices will lead people back to in-town areas with smaller bungalows. If Atlanta is going to keep up this positive trend, there needs to be a continual demand for areas like Capitol View, Home Park, etc. I have some serious concerns about what all these foreclosures are doing to these homes, so if high energy prices help bolster demand for affordable in-town homes, then that is a positive side effect to a crummy situation. Also, I like Atlanta's historic bungalows, and I'm tired of seeing them bulldozed or renovated into McMansions.

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