How OPEC may extend the housing slump

There's a very interesting article by Newsweek columnist Robert Samuelson on OPEC's recent success in acting as a true cartel and keeping oil prices high by limiting production. So how will that prolong the housing slump? In three ways: (1) every additional dollar spent on gasoline, heating oil and other petroleum products is a dollar not available for housing, clothing, food and entertainment; (2) since so many products and services in the U.S. are predicated on cheap energy, higher oil prices directly raise the costs for food (both in grocery stores and in restaurants), travel (both cars and airlines) and daily operating costs for just about every business; and (3) people will resist buying in suburbs -- where most of the new housing has been built over the last 40 years -- as long as gas prices are high and still rising:

For much of its 47-year existence, the Organization of the Petroleum Exporting Countries (OPEC) has been a cartel in name only. It could not, in practice, control oil prices because many of its members regularly breached the production quotas that were intended to regulate the market. So OPEC generally followed oil prices up and down, as supply and demand conditions shifted. But now OPEC may be the real deal: a cartel that works. If so, that's bad news for us...

What's wrong is that a fall of oil prices is one of the mecha­nisms by which a recession or economic slowdown corrects itself. Lower prices for gasoline, home heating oil and diesel fuel improve consumer purchasing power. They muffle inflation and in­crease confidence. In this sense, they're an important "automatic stabilizer" for a faltering economy. If the automatic stabilizer is disarmed—or, worse, transformed into an automatic "destabiliz­er"—then the slowdown or recession may get worse...

Two massive oil miscalcula­tions both aided OPEC. First was a widespread underestimate of world demand, especially from China. Since 1999, China's oil use has almost doubled, to 7.5 million barrels a day (mbd) in 2007. (In 2007, world oil use was 86mbd, up 13 percent from 1999. American oil use was 20.8mbd, up 7 percent.) Second was an overestimate of supply. War, civil strife and nationalization have depressed production in Iraq, Nigeria, Iran, Venezuela and elsewhere. Total global capacity might be 4.5mbd higher with­out these setbacks, says the Energy Policy Research Foundation (EPRINC), an industry research group. The combination of higher demand and stunted supply has pushed up prices...

To some extent, we are paying for past shortsightedness. De­pendence on oil imports, now almost 60 percent of our supply, is inevitable. We simply use too much and produce too little. But we could limit OPEC's market power by curbing our demand and increasing our supply. As the worldwide gap between supply and demand rises, it becomes harder for producers to control the market. More have spare capacity; more are tempted to increase production to raise revenues. Controlling supply today is easier because most producers are operating near their potential...

The American approach is to rant at foreign producers on the silly presumption that they should subordinate their interests to ours. The resulting self-righteousness rationalizes a refusal to do much that would actually influence their behavior and limit their freedom of action. It was only last year that Congress raised fuel-efficiency standards for new cars and light trucks: the dampening effects on oil consumption will be years in coming. We have steadfastly re­jected higher gasoline taxes to curb unnecessary driving and strengthen demand for fuel-efficient vehicles (better to tax ourselves than let foreigners tax us through higher prices). And we have consistently restricted oil drilling in Alaska and elsewhere.

It is a fair commentary that, by doing so little to check its own thirst for imports, the United States has unwittingly con­tributed to OPEC's present triumph. The extent of that tri­umph will be tested this year and next...

Even OPEC may be unable to hold prices at today's high and undesirable levels. Whatever happens, the long-term threat of a global oil cartel will remain. We should be taking the hard steps to limit its power. Considering our past complacency, we probably won't.

And THAT is why the recovery in housing -- especially in the suburbs -- may take much longer than in previous downturns.