Energy Prices—A Sword of Damocles

Gas prices rise to $3.50 a gallon and its late winter when driving demand stays relatively low. Warnings sound-- they may increase to $5 or higher by summer at peak vacation season. Thank you--Messrs Mubarak and Gadhafi. Now everyone worries what would happen if the unrest shifts into Saudi Arabia.

The United States has been living with yo-yoing oil prices for close to four decades—since the Arab Israeli Yom Kipper War in 1973. The country has had ample time to wean itself off the oil addiction—after the 1979 gas lines, in the early 1990s when Saddam Hussein blew up Kuwait’s oil wells, and more recently after 9/11 and the 2008 price hikes. It’s been no coincidence that recent recessions have all coincided with sharply higher energy prices, and concerns grow that the feeble ongoing recovery could reverse quickly if oil prices continue their escalation.

No matter how dysfunctional the Gulf Oil States, they know enough never to let price increases get too out of hand—they don’t want the U.S. ever to have enough incentive to find alternatives, let alone cleaner energy sources. Somehow oil prices always settle back down enough to keep the country addicted. Since oil companies and auto manufacturers helped dismantle mass transit systems in many cities back in the mid-20^th century, these industrial giants also have everything to gain by ensuring that oil prices always get back to a comfortable range for drivers.

But now with augmented India and China appetites for oil—stoked by burgeoning industries and car buying—prices could stay higher especially if the world economy ever gets untracked again. Folks in the U.S. who are already experiencing wage and benefit erosion at the expense of foreign competition can hardly afford sustained higher gas pump prices. Bigger fuel bills also impact farmers and goods transport. Prices head up for everything, including food, hitting consumers hard.

For suburban real estate owners and developers, the energy issue has been a sword of Damocles, ignored for decades. Any time commuter transportation costs skyrocket the cost of living equation shifts in favor of urban convenience, living closer to work and mass transit alternatives to the car. And then, every time Americans begin to orient to more conservation oriented lifestyles—smaller cars and houses—gas prices head lower and everyone relaxes. Give me that SUV.

But today’s higher energy costs now come on the heels of the housing market disaster. Prospective home buyers not only must pony up a lot more equity and consider that their investment may not appreciate significantly, but they also need to factor in those higher transportation as well as heating/air conditioning bills.

For owners of suburban retail and office buildings looking for a near-term lift, the news out of the Middle East and North Africa appears instead like another downer. Shoppers will have less in their wallets—even supermarket visits will mean more penny-pinching. And large office tenants will be harder pressed to lease space in buildings apart from urbanizing nodes as commuting distances become more of an issue for workers.      

Is anyone in the market for a McMansion?