May 2008 – We’ve Been Conned

While this will contain a lot of rhetoric about politics, I will conclude on how this affects our real estate activities.

No question, a current hot button and one destined to worsen, is our energy pickle and the high cost of gas. Unfortunately, it seems only a sharp increase at the pumps jars us into demands of “what is the cause” and “who is to blame.” The con game cranks up with our politicos showcasing public hearings of the oil industry execs. Rep. Maxine Waters from Texas suggested they be nationalized. (I have asked her to send me her proforma cash flow for the first year under government control). Do we ever hear how our elected officials have punted on our being overly dependent on foreign oil ? We now import over 60 % of our demand and rely on such dependable sources as Nigeria and Venezuela!

The con job is the political grandstanding while neglecting to inform of the facts:

# Recent studies indicate that current demand may exceed available oil supplies.

# Our political leaders in the U.S. have discouraged any new oil drilling in the U.S as well as building nuclear plants, which is considered one of the cleanest ways to add new energy capability. (France’s energy is 80% nuclear plants). This makes us scramble to create other sources which is primarily coal– more pollutant than oil.

# We see much political knee jerk to take it out on the oil companies, such as don’t look at their yield on investments but their increasing profits, legislate that they should invest their profits in alternate sources of energy so they cannot do what they do best… for new oil sources. Better yet, take all their profits. Trouble is that is no more than five cents per gallon.

# No question but that we should be pulling out all stops in search for alternate sources – wind, etc. What is needed is a Manhattan type project, investing a lot more money to attract the private sector to pull out all stops to come up with quicker solutions.

# Congress just passed one of the worst farm bills. Buried in the bill was how we are protecting to 2010 corn ethanol, now recognized as a scam.(1) Not only has our underwriting of corn ethanol been one of the largest contributors to increased food costs in the world, but, it is raising havoc with many combustible engines, particularly marine, and, it prevents the importation of sugar cane based ethanol from Brazil, which would love to supply the US with as much as it wants. The big problem: – to protect our corn farmers, the farm bill places an import tariff of 54 cents per gallon.

We have allowed ourselves to be conned by our political leadership. By refusing to take prudent action we now face a near term future with no logic with little hope things will get better. We are going to be buffeted with an unpredictable market for crude oil and some real tough political decisions, which hopefully will be based on prudent logic instead of political scape-goating.

What does this mean to our livelihood in real estate? As it is likely that we will see increased gas prices, the market will react and be very sensitive to drive times. Existing housing and any new projects in the urban west area will suffer. Many will want to move to reduce their drive times. Nearness to metro rail stations as well downtown areas with easy walking to amenities will be in demand. And, we can’t wait for reliable, battery autos! So, buckle your seats, the con job will get worse, as, heaven forbid, our political leaders refuse to admit they have been asleep at the switch.

By: Gary Sisler

Couple of good source reading: Gusher of Lies: The Dangerous Delusions of Energy Independence. Lou Frey Report (1) Gusher of Lies