LOGO

The Twin Bubbles : Housing and Oil

Contents The Twin Bubbles

Housing and Oil

1. History and Introduction

2. Housing Bubble

3.Oil bubble

4. Hedge Funds

History and Introduction

Since the unprecedented crash since the Great Depression 1929, the next crash did not arrive for 44 years.

Then, in 1973, there is a turning point in economic and social annuals of the U.S.

OPEC (oil cartel) imposed an oil in the U.S. and the rest of the world.

As a result, oil price jump has never fallen to the previous level again.

History

Oil price jump during 1973 was not the result of consumer euphoria (normally the bubble stems from the demand side due to consumer’s the irrationality)

In fact, the demand for oil decline after 1972 but oil supplier has been shrinking.

Oil price jumped from $2.50 to $42 per barrel (1,600 per cent)

Nine years later, oil price began fall. By 1986, it’s less than $10 per barrel but it’s not hold to the same level

Oil balloon is a result of the monopolistic action of the cartel (OPEC) that trimming the oil output (embargo)

Oil bubble1973 - 1982

History and IntroductionEffects

Form swiftly

Expand fast

Burst

Demand-side

Its demand outpaces its supply. It stems from the obsession of buyer.

Supply-side

Its supply falls short of demand. It stems from market concentration or producer’s manipulation

Interplay

Bubbles tree-part life cycle

Rule of demand and supply

And the three-part life cycle of bubbleDemand & Supply-side bubbles

Housing Bubble

1987

2001

2002

When Black Monday, Alan Greenspan , head in Federal Reserve, unraveled the crash by using the action causing interest rate declined.

14 years later, he followed the same recipe for disasterControl and began trimming the Federal Funds Rate

The Federal Funds Rate (the interest fee that bank charge each other for overnight loans, then when this rate fall, other interest rate usually follow) fell from 6.5% to 1%

However, Greenspan became award of the phenomenon but dismiss it as a little froth in this market.

Most of buyers purchase home via credit

Low interest rate, low cost of borrowing

It contributes to higher demand

When demand for house rises, price goes up

Why is low interest rate scary? The stages of cut interest rate

1

Between 2001 to 2005, home values had been appreciated 53% nationally in a slow-growth economy but it’s faster than the national wide figure. The report in 2005 shows that alone home price rise to 13.5% that is the fastest pace since 1979.

3

In record numbers, people have been using their home appreciation as vehicles for maintain their lifestyle. They refinanced their mortgage and taken equity out of their homes and used money to consume. So, the nation is sinking in an ocean of debt.

2

1975 – 1995, home price jumped 204% while inflation is 183% - not far from the inflation rate. it surpasses the CPI inflation rate. 1995 – 2000, inflation adjusted rise in home prices was 3% per year but soar 9% per year for 2000 – 2005. Clearly, home values have substantially accelerated in the new millennium.

Data of housing

www.themegallery.com

Speculator’s action

Because sinking interest rate, home demand has expand smartly since 2001, residential output has grown accordingly (2004 – 2005 2 million housing units were built and similar 2006).

However, the population increase can only support an increase of 1.5 million units. That means 500,000 is snapped up by “speculator”- who buys them not to live but to make money from speculation.

Effect on the world

AROUNDAROUND THETHE GLOBEGLOBE

It spreads to other countries

The worldwide rise in home price is the biggest bubble in history prepared for the economy pain when it pops. It will froth from America, Britain, Australia to France, Spain, and China

Home values in the advanced economies of Europe & North America has already climbed more than $30 trillion in the new millennium, property value surpassed GDPs of nation. Home price is very soared

From the Home Price Indexes in the Britain, Britain’s balloon is the largest – home value jump of 154% between the years 1997 – 2005, France is 87%, Netherland is 76% and U.S. is next with a jump of 73%.

The bubble’s direction

Nature of bubble

Spread

Burst

expand

Form

www.themegallery.com

Oil Bubble Stages of bubble

Experts expect no fall in price

Price is predicted to rise

People think it’ll go on

No one recognize until it burst

People foresee it keep rising

Hedge funds prevail

Continue to rise and keep durable

Price jump persist several years

Oil bubble from supply-side

They are the bullies profiteering from the self-generated oil bubble.

oil mergers has raised the pump price at least 10 cents a gallon

the crude oil price as much as $10 per barrel

Big Oil controls over 60% of gasoline production

and 21% of natural gas

Exxon Mobil

Royal Dutch shell

Chevron – Texaco

British – Petroleum – Amoco-Arco

Monopolistic trigger does not come from OPEC

It stems from Big Oil Company

Conoco – Phillips

Hurricane Katrina

During September and October, the Gulf of Mexico was hit by Hurricane Katrina and Rita, several refinery and natural gas platforms were battered. Oil and gas production fall sharply and not surprisingly, energy prices soared, with gasoline to $3 million per gallon and natural gas to as much as $14 million cubic feet. And crude oil jumped to $70 per barrel. The post- Katrina, by March 2006, crude oil was down to $63 per barrel, gasoline averaged $2.30 per gallon and natural gas to $7. This is because demand fell due to a warmer-than-expected winter. Now the question is “why did natural gas prices sink more than 50% ($14-$7), while petroleum gas, especially crude oil, barely budge?”

Answer: the economic power in natural gas (60%) is not concentrated as petroleum production (21%). Therefore, when energy demand fell, natural gas prices fall much faster than petroleum prices. Where there is little competition or excessive concentration , as in oil industry, the law of demand and supply still work but very sluggishly.

Effects

The uncompetitive practices by oil corporations are cause – not OPEC or environmental law – of high gasoline prices around the country

Why did crude hit $78 in July 2006 without a divesting hurricane? The answer comes from the monopolized oil industry along with another factor next.

Bubble

Five Bully controlling over 60% of refinery output Their profit is $298 billion

Hedge Funds

Big Oil Keep persisting Speculation

Five Bullies Price Rise Hedge Funds

Action of speculators for profit

Wall Street and avaricious behavior

1990

Then, crashS

tock Market

2000

Go to oil m

aniaB

ig money

Then

SuperspeculationThere is

2004

$245 trillion(31.8%

)

OTC

grew

Action of speculator

Again, hedge funds is one reason causing crude oil is now so expensive even though

there is no physical shortage of oil anywhere in the world !!

Punishment

Oil companies themselves are speculating and manipulating the future market. This is “Bill O’Reilly reported” on his show :

“A few months ago, I received some critic for telling you that the big American’s oil companies are price gouging. You should have seen my mail. Well, I was right, and here’s the proof. The U.S. commodity futures Trading Commission just fined Shell oil $300,000 for manipulating crude oil market. So, now oil bullies have found another way to shift people through speculation.”

www.themegallery.com

Conclusion !

Twin bubble : Housing and Oil crisis in the new millennium

Causes : Supply- side and Demand side Demand -Side stems from the irrationality of

consumer(decline in Fed Fund Rate contributes to increase consumer’s demand), speculator

Supply-Side stems from the monopoly power (OPEC,1973 and Big Oil company,2004)

Illustration of whole picture

1973 1982 2004 Then,

Oil bubble stems frommonopolistic trigger by OPEC cartel by trimming the output

Oil bubble is punctured as a sign of burst and then price steady decline

There are mergers act as monopolist and they cornered causing oil price jump and accompanied with speculation

Oil bubble displays mixture of both supply and demand-side

It’s clear that oil market is bubble

www.themegallery.com

A rare phenomenon, the rupture’s perils are magnified!! That is the crucial juncture where we stand today, and the resulting explosion could be brutal in the near future

Lead to future’s pain

Big oil

Oil Bubble

HousingBubble

Fed Funds RateSpeculation

Economic Chaos

The Twin Bubbles

Housing and Oil Crisis

LOGO