The Twin BubblesContents Housing and Oil 1. History and Introduction 2. Housing Bubble 3.Oil bubble 4. Hedge Funds
History and Introduction Since the unprecedented crash since the Great Depression 1929, the next crash did not arrive for 44 years. Then, in 1973, there is a turning point in economic and social annuals of the U.S. OPEC (oil cartel) imposed an oil in the U.S. and the rest of the world. As a result, oil price jump has never fallen to the previous level again.
History Oil price jump during 1973 was not the result of consumer euphoria (normally the bubble stems from the demand side due to consumer’s the irrationality) In fact, the demand for oil decline after 1972 but oil supplier has been shrinking. Oil price jumped from $2.50 to $42 per barrel (1,600 per cent)
History and IntroductionEffects Oil bubble 1973 - 1982 Oil balloon is a Nine years result of the later, oil price monopolistic began fall. By action of the 1986, it’s less cartel (OPEC) than $10 per that trimming the barrel but it’s not oil output hold to the same (embargo) level
Rule of demand and supplyDemand & Supply-side bubbles And the three-part life cycle of bubble Interplay Demand- Supply- side side Its supply Form swiftly falls short of Its demand outpaces its demand. It supply. It Expand fast stems from stems from market the obsession Burst concentration of buyer. or producer’s manipulation Bubbles tree-part life cycle
Housing Bubble When Black Monday, Alan Greenspan , head in Federal 1987 Reserve, unraveled the crash by using the action causing interest rate declined. 14 years later, he followed the same recipe for disaster 2001 Control and began trimming the Federal Funds Rate The Federal Funds Rate (the interest fee that bank charge 2002 each other for overnight loans, then when this rate fall, other interest rate usually follow) fell from 6.5% to 1% However, Greenspan became award of the phenomenon but dismiss it as a little froth in this market.
Why is low interest rate scary?The stages of cut interest rate Most of buyers purchase home via credit When demand for Low interest rate, low cost of borrowing house rises, price goes up It contributes to higher demand
Data of housing 1 2 3 Between 2001 to 2005, 1975 – 1995, home price In record numbers, people home values had been jumped 204% while inflation have been using their appreciated 53% is 183% - not far from the home appreciation as inflation rate. it surpasses vehicles for maintain their nationally in a slow- the CPI inflation rate. 1995 – growth economy but it’s lifestyle. They refinanced 2000, inflation adjusted rise faster than the national their mortgage and taken in home prices was 3% per equity out of their homes wide figure. The report in year but soar 9% per year for 2000 – 2005. Clearly, and used money to 2005 shows that alone home values have consume. So, the nation is home price rise to 13.5% sinking in an ocean of that is the fastest pace substantially accelerated in the new millennium. debt. since 1979.
Speculator’s action Because sinking interest rate, home demand has expand smartly since 2001, residential output has grown accordingly (2004 – 2005 2 million housing units were built and similar 2006). However, the population increase can only support an increase of 1.5 million units. That means 500,000 is snapped up by “speculator”- who buys them not to live but to make money from speculation.
It spreads to other countriesEffect on the world AROUND THE GLOBE The worldwide rise in Home values in the From the Home home price is the advanced economies of Price Indexes in the biggest bubble in Europe & North Britain, Britain’s balloon history prepared for the America has already is the largest – home economy pain when it climbed more than $30 value jump of 154% pops. It will froth from trillion in the new between the years 1997 America, Britain, millennium, property – 2005, France is 87%, Australia to France, value surpassed GDPs Netherland is 76% and Spain, and China of nation. Home price is U.S. is next with very soared a jump of 73%.
The bubble’s direction Form expand Nature of Burst bubble Spread
Stages of bubbleOil Bubble Experts expect no fall in price People foresee it keep rising Price is predicted to rise Hedge funds prevail People think it’ll go on Continue to rise and keep durable No one recognize until it burst Price jump persist several years
Monopolistic trigger does not come from OPECOil bubble from supply-side It stems from Big Oil Company They are the bullies profiteering Exxon Mobil from the self-generated oil bubble. oil mergers has raised the pump price at least 10 cents a gallon Royal Dutch shell the crude oil price as much as $10 per barrel Conoco – Phillips Big Oil controls over 60% of gasoline production Chevron – Texaco and 21% of natural gas British – Petroleum – Amoco-Arco
Hurricane Katrina During September and October, the Gulf of Mexico was hit by Hurricane Katrina and Rita, several refinery and natural gas platforms were battered. Oil and gas production fall sharply and not surprisingly, energy prices soared, with gasoline to $3 million per gallon and natural gas to as much as $14 million cubic feet. And crude oil jumped to $70 per barrel. The post- Katrina, by March 2006, crude oil was down to $63 per barrel, gasoline averaged $2.30 per gallon and natural gas to $7. This is because demand fell due to a warmer-than-expected winter. Now the question is “why did natural gas prices sink more than 50% ($14-$7), while petroleum gas, especially crude oil, barely budge?” Answer: the economic power in natural gas (60%) is not concentrated aspetroleum production (21%). Therefore, when energy demand fell, natural gasprices fall much faster than petroleum prices. Where there is little competitionor excessive concentration , as in oil industry, the law of demand and supply stillwork but very sluggishly.
Effects Five Bully controlling over 60% of refinery output Their profit is $298 billion BubbleWhy did crude hit $78 inJuly 2006 without a divesting The uncompetitive practiceshurricane? The answer by oil corporations are cause –comes from the monopolized not OPEC or environmental lawoil industry along with – of high gasoline prices aroundanother factor next. the country
Action of speculators for profitHedge Funds Five Bullies Price Rise Hedge Funds Big Oil Keep persisting Speculation
Action of speculatorWall Street and avaricious behavior 1990
Again, hedge funds is one reason causingcrude oil is now so expensive even though there is no physical shortage of oil anywhere in the world !!
Punishment Oil companies themselves are speculating and manipulating the future market. This is “Bill O’Reilly reported” on his show : “A few months ago, I received some critic for telling you that the big American’s oil companies are price gouging. You should have seen my mail. Well, I was right, and here’s the proof. The U.S. commodity futures Trading Commission just fined Shell oil $300,000 for manipulating crude oil market. So, now oil bullies have found another way to shift people through speculation.”
Conclusion ! Twin bubble : Housing and Oil crisis in the new millennium Causes : Supply- side and Demand side Demand -Side stems from the irrationality of consumer(decline in Fed Fund Rate contributes to increase consumer’s demand), speculator Supply-Side stems from the monopoly power (OPEC,1973 and Big Oil company,2004) www.themegallery.com
It’s clear that oil market is bubbleIllustration of whole picture 1973 1982 2004 Then, Oil bubble Oil bubble is There are Oil bubble stems from punctured mergers act as displays mixture monopolistic as a sign of monopolist of both supply trigger by burst and and they and demand- OPEC cartel then price cornered side by trimming steady causing oil price the output decline jump and accompanied with speculation
A rare phenomenon, the rupture’s perils are magnified!!That is the crucial juncture where we stand today, and theresulting explosion could be brutal in the near future www.themegallery.com
The Twin BubblesLead to future’s pain Housing and Oil Crisis Oil Bubble Big oil Housing Bubble Economic Chaos Fed Funds Rate Speculation