Published: October 27, 2009 02:36 pm      

Fuel prices, not real estate, led to meltdown

Steve Boggs, Democrat Publisher

Bad loan practices and shoddy mortgages may have contributed to the severity of the current economic crisis, but it was the 2008 run-up in fuel prices that triggered this meltdown.



Economists across the board blame the housing crisis for our current economic state. Banks and sub-prime lenders wrote trillions of dollars in bad paper, giving loans to people who could not afford them. Payments on sub-prime loans that ballooned two or three years into the life of the loan led to record-high foreclosure rates. That, in turn, led to a drop in home prices, which led to the credit crunch. The snowball effect has led to massive job layoffs across the country.



Really? How do we get from bad mortgages in less than 10 percent of the county to massive nationwide job losses? Sorry, but those dots don’t connect. It’s hard to dispute the record when it comes to bad real estate loans – made primarily in places like California, Las Vegas and Florida. Real estate prices have been overvalued in those places for many years, and cheap credit brought many borderline buyers into a debt structure they could not maintain.



However, it takes a lot more than shaky loans in a handful of states to double unemployment rates in less than 18 months. To get that kind of economic impact, one needs a massive exodus of capital from the nation’s economy. Billions of dollars would have to disappear from family budgets, and from the collective bottom line of small businesses.



That came in 2007, when fuel prices began rising for no apparent reason. Gasoline almost tripled in price in less than six months. Diesel prices reached $5 a gallon, even in Texas. Commuting costs went up, as did the cost of business. Fuel charges became standard for literally every facet of business in the country. It led to a hike in the price of literally every raw material known to man – from steel to shingles to concrete and even ink.



Think about it. Every American family settles into a normal equilibrium of expenses between paychecks. We allot so much for rent or a house payment, so much for groceries, and so much for utilities. When fuel prices began soaring, grocery costs skyrocketed, as did utility bills, and even the cost to get to work. When you add $100 a month to your average gasoline bill, another $50 to your grocery bill, and $40 a month to your electric bill, it’s a major strain on the family budget. For someone making $30,000 a year, or $2,500 a month, an additional $200 a month in expenses is a big chunk. That money had to come from somewhere, and it did. We stopped going out to eat, and restaurants began to close. We stopped shopping, and retailers laid off workers. We stopped traveling, and hotels, airlines and resorts laid off workers.



The effect on small business folks was even more profound. As the cost of raw materials and transportation rose, profit margins sank. Most small businesses had to layoff one or two people, and the ripple effect of job losses began to mount. It gained enough momentum that it began feeding on itself.



Fuel prices literally sucked billions upon billions of dollars out of the economy in a few short months.



Ironically enough, once the outrageously high fuel prices triggered the recession, the economy collapsed to the point that the high prices were not sustainable. The price of oil and gas fell, and drilling ceased in most of the U.S. More layoffs, more foreclosures. Remember the 2008 Republican National Convention? There were chants of “drill, baby, drill.” When is the last time you heard the term ANWAR brought up in a conversation?



There’s no question the shaky real estate market was a crisis in waiting. A lot of loans were made to people who could not afford them, and in many cases people got hosed by predatory lenders. It would have taken a lot of effort, diligence and enhanced regulation to move past the bursting of the real estate bubble in less than 20 percent of country, but the U.S. economy could have handled that. Banks and lenders would have reworked loans to avoid foreclosures, if only they were dealing with people who had jobs. I certainly do not remember the economy being this bad during the savings and loan crisis.



Wall Street is to blame for this economic meltdown, but not for reasons we’re being led to believe. It was the traders who ran up the price of fuel in the name of profits. The oil companies benefited, to be sure, but even they could see all along that $141-a-barrel oil was not based in any sort of reality. The crash was inevitable.



What happened to fuel prices between October 2007 and July 2008 was created artificially. Supply and demand has a limit on both ends when it comes to oil and gas production. Oil doesn’t spike from $50 to $141 a barrel on its own. It was manipulated by forces outside the industry.



Fuel costs based on supply and demand would have slowed the U.S. economy in a slow and orderly fashion. The spike we endured ground it to a halt. Don’t let anyone tell you otherwise.