Double Whammy: Oil and Housing

By Jennifer Hopfinger
June 10, 2008 06:39 PM

BusinessWeek magazine’s June 9th cover story, “Oil and the Economy,” offers a dire prediction to readers this month: “the double whammy of rising oil prices and plunging home prices could turn a mild recession into something more threatening.”

Writer Peter Coy does a great job of explaining how oil and housing are working together to force the U.S. economy into a downward spiral. Because rising oil prices and falling home prices have hit so hard, so suddenly, usually resilient American families and businesses are “breaking rather than bending.” To make matters worse, the Federal Reserve is in the difficult position of creating policy to address both deflationary and inflationary forces at work.

“It seems strange that oil prices are soaring at a time when the housing slump is killing economic growth,” Coy writes. “One explanation, of course, is that the appetite for oil is still strong in China and other parts of the world where growth is stronger. But even in the U.S., high oil prices have done little so far to suppress demand. That's because there's no ready substitute. People are consuming nearly as much gas now as when it cost half as much because they don't have much choice if they want to buy groceries and get to work.

“Meanwhile, production of oil hasn't gone up much, either, because companies are already producing flat-out from existing fields. The result is that the soaring price hasn't caused a glut, as you would expect if oil were overpriced. And that has emboldened speculators to keep bidding the price higher, testing what the market will bear.”

Coy speculates that Americans will eventually adjust to higher oil prices and that falling home prices will make homes affordable to a new wave of buyers. “Right now, though,” he writes, “it's hard to see past the pain.”

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Copyright © 2008 Donald W. Reynolds National Center for Business Journalism