The Oil Slump, Explained
Global oil prices continue to tumble, trading around $30 a barrel, down almost 70% since June 2014. The oil slump has sent shockwaves through financial markets, with some fearing it could be the catalyst for a new recession.
But what's behind the plunging price of oil and how will it affect the real estate industry? Bisnow breaks down the economics behind it—and gives you a quick overview of everything you need to know about the oil slump.
Why are oil prices falling?
It all comes down to supply and demand: there's a whole lot more crude than is actually needed.
In the US, domestic output has doubled over the past six years, largely because of the shale boom. Meanwhile, traditional exporters such as Saudi Arabia, Nigeria and Algeria—that once sold oil to the United States—are now competing for Asian markets, driving prices down. Other key producers such as Canada, Iraq and Russia keep pumping and ramping up exports each year.
The result? A massive glut in oil supply, as global production has hit record highs, while demand has slowed. In Europe and some developing countries, economies are weak and vehicles are becoming more and more energy efficient.
But if oil prices fall, isn't that a good thing?
With crude down, gasoline prices have fallen sharply, which is good news for anyone who drives. In addition, households that use heating oil to warm their homes are also saving.
The theory goes if the consumer saves more money at the gas pump, there's more income to be spent elsewhere. Economists expected the drop in gasoline prices would boost spending by US consumers and businesses—but that's not actually happening.
Instead, business investment has slowed and consumer spending has been uneven: while car and home sales are up, retail sales have been sluggish. In addition, more and more consumers are funneling their savings into bank accounts, rather than spending or investing.
So how is this affecting real estate?
In energy-dependent states like Alaska, North Dakota, Texas, Oklahoma and Louisiana, the oil slump may slow down construction and leasing activity on office and industrial properties.
North Dakota, the epicenter of the shale boom, is the most at risk: the oil crisis could lead to people losing their jobs and, as a result, bring down home sales. In Houston, vacancies, stalled projects and low prices have become the new normal, at least in the short term.
The plunge in crude prices does not directly impact the real estate of other markets (some even think that it could be a boon to the hospitality and retail industries), but there is an impact, and it comes from the current market volatility. If commodities keep tumbling, the ripple effect could weigh on the near-trillion dollar value of REITs—and their $6.2B in daily trading volume.