At first, it might seem that a gallon of gas doesn't have a great deal to do with real estate values. But energy costs -- and especially gas prices -- directly influence how much folks will pay for a house.
When energy prices rise, costs throughout the economy are impacted, the entire economy is effectively taxed. Higher fuel costs without extra productivity add to inflationary trends. Mortgage lenders, and other lenders, then seek higher interest rates to compensate for the buying power lost to inflation.
Higher mortgage rates reduce mortgage affordability, and as the pool of potential buyers contracts, there's less competition for homes generally. The end result? Less real estate demand, fewer sales, higher operating costs and less pricing push.
President Bush has now proposed that we build more oil refineries and nuclear power plants, and that we convert old military bases for such purposes.
Such proposals are hardly complete, but they would do much to reduce energy costs while also resolving a difficult political problem.
The Bush plan inherently touches five core issues, each of which is important for what is said -- and not said.
Nuclear: President Bush says, "America has not ordered a new nuclear power plant since the 1970s. France, by contrast, has built 58 plants in the same period. And today, France gets more than 78 percent of its electricity from safe, clean nuclear power."
The electricity not generated from nuclear systems is largely powered by other fuels such as coal, gas and oil. More hydro-electric power would be great, but where can we build more dams? More energy from wind, geothermal sources and the sun would also be great, but current systems do not represent a replacement technology nationwide.
The practical reality is that nuclear power is here, now, and as done in the U.S., it's safe.
The accidents at Three-Mile Island and Chernobyl are often discussed as if they were equally severe. That's not the case -- the technologies are radically different, plant construction is entirely different and most importantly, as the Nuclear Regulatory Commission points out, the accident at Three Mile Island "led to no deaths or injuries to plant workers or members of the nearby community."
Compare this with the ongoing human and environmental damage associated with coal production, our major source of fuel for electrical generation. According to the Mine Safety and Health Administration, 59 coal miners died in accidents during 2003. Plainly, this is a figure which says nothing about miners who die in other ways. Take Coal Workers' Pneumoconiosis (CWP) as one example: According to the Journal of the American Medical Association, in the period from 1968 through 2000 "pneumoconiosis was recorded on 124,846 death certificates."
Oil Refining: If more oil were available tomorrow, we would lack the capacity to refine it. In such circumstances we could easily see a situation where oil prices fall while gas remains stubbornly expensive.
If we started to increase refining capacity today, such facilities would not come online for several years. If we do not begin to construct refineries now, then we will have a perpetual inability to refine such oil as we are able to produce or import.
It's fair to say that refineries are huge, costly, complex and that they represent potent environmental issues. That said, we know far more about clean refining than we did in 1976, when the last U.S. refining facility was built. Simply put, we no longer have the luxury of deferring such construction unless we are willing to face vastly higher gas prices -- if we can get oil at all.
It's a huge mistake to believe that oil exporters will always provide such oil as we may want. Civil war in Saudi Arabia or Iran could lead to spotty production as we see today in Iraq. A political decision to simply limit or end exports could also occur -- it has happened before.
As the Department of Energy points out, in 1973 the "Organization of Arab Petroleum Exporting Countries, cutting further into the supply of oil and elevating prices to levels previously thought impossible." At the time, President Jimmy Carter said the Arab oil embargo was the "moral equivalent of war."
Base Development: If you're a politician, you want as many military bases as your district or state can possibly hold. Whether the country actually requires such facilities is not the issue; such bases mean ongoing local employment, and spending, with the result that when the military says it really doesn't need a given base, politicians do everything possible to assure that local facilities continue.
Over the years a number of local bases have been closed and in many cases, such facilities have been converted to other uses. What Bush is suggesting is a trade: Fewer bases in exchange for ongoing local and higher-paid employment from energy production and refining. Given that many military bases are huge facilities, there is much to recommend the Bush proposal, including the fact that it addresses a sure political dilemma.
Oil Production: On the radio one day, a commentator was explaining that the solution to the gas shortage was to simply dig more wells. This is one of those suggestions which sounds sensible in theory but makes no sense in practice. Here's why:
Oil prices are based on world supply and demand, not national trends -- the reason growing oil consumption in China impacts U.S. energy prices. If the U.S. increased production, OPEC members could simply produce less to maintain prices -- in effect, oil in the ground will become more valuable per barrel as production is limited. If you're an oil producer with a current accounts surplus, then higher prices and less production represent an ideal scenario.
Just drilling more U.S. wells is not practical. An average U.S. well produces just 17 barrels per day, according to Gibson Consulting. In contrast, Gibson says a typical Saudi well generates 12,000 barrels per day.
In other words, if we drilled 700 typical U.S. wells, the Saudis could simply shut down one well and world output would remain flat. There would be no price reduction.
Fuel Conservation: While President Bush deserves credit for several of his proposals, and while he does propose tax incentives for energy-efficient vehicles, more ethanol and biodiesel production, and extending tax incentives for energy-efficient vehicles, he has failed to address our most obvious problem, auto mileage.
In the past week, oil prices fell below $50 a barrel, in part, because the U.S. economy is thought to be contracting and thus likely to use less energy. In other words, less demand equals lower fuel prices.
We now have a lame-duck president -- who better to propose a national gas tax? Who better to demand more gas efficiency from Detroit?
A gas tax would dampen consumption, reduce the need for refinery capacity, and increase federal revenues, benefits that should not be ignored. It would be painful.
Alternatively, we can continue as petroleum junkies and remain dependent on suppliers. The marketplace will then carry prices higher and one result will be ongoing pressure to raise mortgage rates and lower home values. We will also continue to send dollars overseas and rely on suppliers who may one day, decide -- again -- to use an embargo against us.