Of
the approximately 300 articles I've
written on the subject of real estate,
this one could be the most important
one.
If
you've never heard the term "Peak
Oil" before you're definitely not
alone. I estimate that less then one in
twenty people in North America have ever
heard of this term before, and know of
its implications.
I've
been following this subject quite
intensely for about a year now, and I've
known that there would probably come a
time when I'd need to write an article
about it. And then, ten days ago, while
addressing a conference on the subject,
Matt Simmons dropped the following
bombshell on the audience that had me
decide that now was definitely the time
to write the article:
"We
could be looking at $10.00 a gallon gas
this winter."
Before
you say something like, "There's no
way that could happen," let me
explain to you who Matt Simmons is. He's
the founder of Simmons
and Company International, an
investment banking firm specializing in
the energy industry that's acted as a
financial advisor for over 60 billion
dollars in transactions, including 385
merger and acquisition transactions.
Simmons and Company International is
also considered to be one of the most
important investment banking companies
for oil drilling in the Middle East. In
addition, Matt is a member of the
prestigious Council on Foreign
Relations, which means he meets
regularly with former U.S. Presidents
and foreign dignitaries from all around
the world to plan out global strategy,
and he's also an energy advisor to
President George W. Bush. And finally, in
addition to all this, he's the author of
the book, "Twilight
in the Desert: The Coming Saudi Oil
Shock and the World Economy,"
which was released in May of this year.
OK,
now that I've explained to you who Matt
Simmons is and mentioned his quote on
what may happen with the price of
gasoline in the months ahead, let me now
explain to you what the term "Peak
Oil" means.
When
oil fields are new, and petroleum is
beginning to be extracted from them,
they continue to produce increased
amounts of petroleum every year until
the production from the field reaches
its peak level. Then after this peak
amount of production is achieved, the
field will only be able to produce
lesser and lesser amounts of petroleum
every year thereafter. This is the very
nature of the petroleum extraction
process.
So
in 1970, the petroleum production from
our own oil fields here in the United
States reached their peak levels of
production. And after that year we've
been only able to extract lesser and
lesser amounts of petroleum from our
domestic fields, making us far more
dependent on foreign countries for our
petroleum. But along the way, our demand
for petroleum has increased
considerably, making us even more
dependent on importing our needed oil
from foreign countries.
Fortunately
for us in recent decades, foreign
countries, primarily from the Middle
East, have been willing and able to
supply us with the petroleum we've
needed to run our economy. But because
of the nature of how oil fields peak in
their levels of production over time and
then go into decline, this may no longer
be possible. There are many petroleum
experts who now feel that Saudi Arabia
may be peaking in their levels of
petroleum production right now, and if
this is true it means that global
petroleum production is also peaking.
This is because there have been no major
discoveries of new oil fields in the
world since the 1960s, and since the
petroleum companies have been searching
everywhere for over 35 years to find new
fields, it's unlikely that any new major
oil fields are still left to be
discovered.
So
even though we still have approximately
50% of the world's known oil reserves
still underground in these fields that
have already been discovered, the aging
of these fields themselves, combined
with the technology available for
extracting the petroleum from them,
means that the world is about to
experience a time when DECREASING
amounts of petroleum will be available
every year as compared with the
increasing amounts that we've always had
available up until now. So in taking
what you've previously learned about the
basic economics of supply and demand, if
you have a product with continually
increasing demand, and a corresponding
supply of that same product that is
continually shrinking in quantity, what
is the likely result going to be in
terms of the market price for that
product?
Now
in recent years we've been dealing with
a substantially increased demand from
around the world for petroleum.
Countries that didn't use much petroleum
years ago are now becoming more
westernized, and their demands for
petroleum have skyrocketed, too. So now
when you factor-in this continually
growing demand for petroleum along with
our own, combined with what looks like a
continually shrinking supply of
petroleum beginning in the months ahead,
you'll probably get an idea of just how
high the price of gasoline can go.
But
up until right now we've been fortunate
in that the rising gasoline prices we've
been experiencing have been due
primarily to increased world demand for
petroleum amid a rising and/or peaking
supply of world petroleum at the same
time. But once it becomes clear that the
same quantities of petroleum are no
longer going to be available to all of
us and will in fact be shrinking, our
lives could change very quickly.
And
in having seen a number of interviews
over the past year with Matt Simmons on
this subject, I can tell you that he
appears to be a man who is very sincere
in his concern about what all of this
could mean to our world economies. He's
been a crusader on this subject for
years now along with top petroleum
geologists, but until recently they've
had a tough time getting anyone
including the petroleum companies to
listen to them. But people are now
beginning to listen to them more and
more.
And
in moving forward, the ramifications of
all this are so unbelievably huge that
it's not easy to discuss all of them in
this article. But I'm going to do my
best for you here. You see petroleum,
and its fossil fuel cousin natural gas,
which is also going through its own
levels of depletion, are necessary for
so very many things that we've come to
enjoy in our lives:
1)
The gasoline to drive our cars
2) The
energy for heating and air conditioning
our homes and offices
3)
The energy to manufacture almost every
product in existence
4)
The energy to distribute almost every
single product and transport it from the
factory to the warehouses, to the retail
stores, and finally into our homes and
offices
5)
The ingredients in many of the finished
products we see, including any products
that contain plastic
6)
The fertilizers and pesticides necessary
to grow fruit and vegetables...It's
because of the use of petroleum and
natural gas products that we've been
able to grow 40 or more times the amount
of food from an acre of farm land as
compared with what we could grow 100-150
years ago
So
when you look at all this, what do you
think a substantial rise in the cost of
petroleum could mean to real estate
values, profitability in businesses, our
national and global economies, and our
own personal lifestyles?
With
a substantial rise in the cost of
petroleum:
1)
What would happen to the costs of
production and distribution for
businesses on a worldwide basis?
2)
What would happen to employment levels
for the workforce?
3)
What would happen to people's savings
and finances while dealing with higher
energy costs for their own homes and
higher gasoline prices for their own
transportation?
And
I have to tell you here that I don't
enjoy looking at this potential scenario
at all. I'm really a "glass is half
full" kind of guy, always looking
for the positive things about life. But
I can tell you that I have studied this
subject intensely for about a year now,
have read countless articles on it, have
listened to audio CDs about it, and have
watched DVD interviews with the world's
top experts on it. And the scenario
painted by all of these experts is far
from being anything like a great one for
any of us to imagine.
But
I feel it's important as someone who
reads my articles to tell you what I've
studied on this subject, and then allow
you to do your own additional research
and draw your own conclusions from it.
Personally I hope this all never comes
to pass, but I have to pay attention to
the warning signs that I'm learning from
the people who are far greater experts
on this subject than I am.
And
when it comes the subject of replacing
petroleum with alternative forms of
energy, the immediate future does not
look rosy there either. For one, I had
always heard about the promising future
of hydrogen as an alternative energy
source, and then I did my own homework
on the subject. It turns out that it
takes the energy from six gallons of
gasoline to create one gallon of
hydrogen suitable for burning as a motor
fuel. So hydrogen is not an option for
us right now.
Second,
we've heard a lot recently on the
subject of using biodiesel and ethanol as
alternative sources of fuel instead of
petroleum. We've even heard about people
running their cars and trucks on these
alternative fuels also.
But
some of the problems with biodiesel and
ethanol are:
1)
We don't have enough land in the right
climate to grow the quantity of crops
for these fuels that will be necessary to replace the
amounts of petroleum that will no longer
to be available for us
2)
Growing the crops necessary for
biodiesel and ethanol and putting them through the
chemical processes required to transform
them into fuel will in itself
consume large amounts of petroleum and
natural gas
And
the other arenas that include
hydroelectric power, wind power, solar
energy, and nuclear energy all have
substantial limitations when it comes to
being able to replace the energy that
will no longer be available to us from
petroleum also.
OK,
so what does all of this mean to you as
someone in real estate? Well keep in
mind we're really in uncharted waters
here. It's not like we can look to the
past and learn from all the times
something similar to this has happened
to us. This is a very unique and
unprecedented event in our lifetime,
and in world history, too. But here are
my thoughts on what this could mean to
all of us who are in real estate:
1)
The values of homes and residential
rental properties in and closer to major
cities will probably do better in the
long run versus those located farther
away in the suburbs. Especially when
compared with those suburbs that have a
high percentage of their population who
commute a great distance to major cities
for their jobs. This is because the cost
of commuting could become so expensive
that people will do whatever it takes to
live closer to the city rather than
spend so much money on gas.
2)
Office buildings will experience a major
increase in heating and air conditioning
costs, especially those located in areas
with severe winters or very hot summers.
Landlords of these buildings could
experience a substantial loss in their
profits if their leases don't call for
their tenants to pay for any increases
in heating and air conditioning
expenses. And conversely tenants who
will be paying for these increased
expenses themselves will find this
solidly biting into their own profits.
3)
Commercial and industrial properties
closer to the major cities will do much
better than those in the suburbs. With
more people living closer to the major
cities and not driving as much, commercial space in these areas
will command even more of a premium in
the future when compared with commercial
space in the suburbs.
4)
There will be a need for a much greater
amount of housing near the central
business districts of major cities.
People will want to live closer to where
they work and they'll also want to be
within walking distance to both shopping
and entertainment. This will create a
demand for revitalizing central business
districts and creating a more
neighborhood-friendly environment with
shopping, entertainment, and restaurants
all nearby.
5)
Industrial businesses will transition
away from shipping and receiving their
goods by truck and towards shipping and
receiving them by rail which will be
more economical for them. And as a
result we'll see a surge in demand for
rail-served manufacturing and warehouse
buildings, and those buildings without
rail will sit vacant for longer periods
of time and command less rent when
they're finally leased. So while in
recent years owning a rail-served
building may not have meant much to your
prospective tenants, you may very well
have a functionally obsolete building on
your hands years down the road no matter
what kind of condition it's in and how
high the ceilings are if your
prospective tenants can't ship by rail.
6)
Manufacturing businesses that already
have substantial energy costs right now
will be hit very hard with the coming
increases in these costs and will find
it increasingly difficult to remain
profitable.
In
addition, I'm hearing from agents all
over the country that their markets are
cooling down now and listings aren't
moving as fast as they were months ago.
In looking over the past 25 years in our
industry, through three economic up
cycles and two down ones, this is
exactly the way the down cycles have
begun in the past. In both situations
there was a gradual cooling off period
where buyers were no longer willing to
pay the higher prices, but sellers still
wanted to get the higher prices anyway.
And when you're talking about selling
commercial or investment properties with
owners who don't need to sell them if
they don't want to, this can become very
frustrating when you're an agent. But if
you study Peak Oil and become very
knowledgeable about it, you may be able
to persuade your owners that they may be
far better off selling their property
now at the best price they can get for
it, rather than waiting and taking their
chances one or more years down the road.
And in saying this to you, the real
estate world was full of owners during
the last two recessions who really
wished they had sold their property 2-3
years earlier while times were still
good. Remind your owners of this, show
them the underlying warning signs of
where your market could be headed,
including the potential problems with
Peak Oil, and you just might convince
them that they could turn out to be
market timing geniuses if they move
forward and sell right now.
One
thing I find interesting about Matt
Simmons mentioning the possibility of us
experiencing $10.00 a gallon gasoline
prices in the months ahead is the fact
that about two years ago he mentioned
that he saw the price of gasoline
eventually rising up to be about
$7.00/gallon, but that it would take a
number of years for this to happen. Well
the price of gasoline has risen
substantially over the past two years,
but we're still at about $3.00 a gallon
right now, a full $4.00 a gallon short
of that $7.00 figure. So I have to
believe that for a man of his stature in
the petroleum industry to revise his
estimate upward by $3.00 a gallon at
this time, he must be seeing some very
strong indicators in the marketplace
that are causing him to do so. People
with his reputation don't make
predictions like this unless they feel
there's a solid reason to do it. And in
looking at the price of gasoline, even
if it rises up to $4.00-$5.00 a gallon
over the next 12-18 months, the impact
this could have on our economy and on
our real estate markets could be huge.
And
in moving forward, there's a quote I
heard from the great hockey player Wayne
Gretzky years ago that I've always
thought was appropriate to apply to the
most successful people in business. When
asked what made him so much better than
all the other players in the game he
replied, "Most players skate to
where the puck is. But I skate to where
the puck is going to be."
As
an expert agent advising your clients,
you want to be able to tell them where
the puck is going to be in real estate.
The future may not always look rosy, but
the better you are at recognizing where
the market is headed, and the better you
are at persuasively communicating this
to your clients, the better off your
clients will be and the more money
you'll make in the process.
So
do some Internet searches under the term
"Peak Oil" and do your own
research. While I certainly hope that
these experts are wrong and that we'll
be experiencing great economic times for
many years to come, I must tell you that
the case they're making is very
compelling. So much so that I've heard
of at least two major real estate
investment companies who are now making
changes to their portfolios because they
see it coming also.
But
do your own homework, draw your own
conclusions, then take the appropriate
action to ensure that you're doing
everything possible to always succeed in
the biggest way you can in your real
estate market.
***PEAK
OIL UPDATE***
Three
weeks after I published this article, the
U.S. House of Representatives passed a
resolution emphasizing the immediate
urgency we're facing with Peak Oil. Please
click here
to read this resolution.
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