Net Oil Exports Revisited

My concluding statement from this article: "It would seem from this case that these factors could interact this year produce to an unprecedented--and probably permanent--net oil export crisis."

I thought that it would be interesting to compare the decline since December in world crude + condensate production to the decline in production from the top 10 net oil exporters (based on the 2004 list of top exporters).

As of the May, 2006 EIA numbers, the world is down 1.3% since December, an annual decline rate of 3.1% per year, but the top 10 oil exporters are down 3.0%, an annual decline rate of 7.2%.

Note that consumption is growing quite rapidly in most of the exporting countries, and note that in most cases domestic consumption is satisfied before oil is exported. In the captioned article, I showed, using my "Export Land" model, how a 25% drop in oil production and a 20% increase in consumption (over a five year period) would lead to a 70% drop in net oil exports.

I estimate that net oil exports from the top exporters are probably down by 4% to 5% (over a five month period), an annual decline rate of as much as 12% per year, which suggests that exports from the top exporters are falling about three to four times faster than world oil production is falling

As I have been relentlessly pointing out, I think that we are looking at a series of bidding cycles for declining net oil export capacity, with the oil going to the high bidders and with the losers having to reduce consumption. Leanan, on The Oil Drum, has docuмented several case histories of poorer countries having to reduce consumption. Soon, the developed and rapidly developing countries will be bidding against each other, instead of bidding against regions like Africa.

However, we are beginning to see clear signs of stress here in the US, among poorer households and among financially overstretched homeowners. Consider some recent numbers from the 8/21/06 issue:

"The No-Money-Down Disaster"
8/21/06

Summary:

32.6% of new US mortgages and home equity loans in 2005 were interest only, up from 0.6% in 2000
43% of first-time home buyers in 2005 put no money down
15.2% of 2005 buyers owe at least 10% more than their home is worth
10% of all home owners with mortgages have no equity in their homes
$2.7 trillion dollars in loans will adjust to higher rates in 2006 and 2007

At the end of 2003, 1% of Washington Mutual's (WaMu's) option ARM (adjustable rate mortgage) loans were in negative amortization (the borrowers were borrowing more money each month, not even paying enough to pay the monthly interest charge in full). At the end of 2005, 47% of WaMu's option ARM's were in negative amortization (55% by value of the loans).

WaMu is booking these negative amortization payments as earnings. In prior times, loans where borrowers were making less than the interest payments would be classified as non-performing loans. In January-March, 2005, WaMu booked $25 million in earnings from negative amortization payments. In the same period in 2006, WaMu booked $203 million in earnings from these payments. These borrowers are increasing their mortgage balances as property values have started falling, so the default risk on these loans is extremely high.

Mr. Witter estimates that a simple revision to the mean suggests a 30% drop in residential property values in the US over the next three years. This is without considering in the effect of further increases in energy prices.

A Proposed Triage Plan

I believe that vast expanses of American Suburbia are going to become virtually abandoned in the years ahead. Alan Drake has noted that a good deal of suburbia was so poorly constructed that a lot of it is biodegradable. Alan has outlined how we can go back to what we used to have: electric trolley cars connected to electric light rail lines.

CBS Sunday Morning, on 8/20/06, had a segment on "tiny houses." They profiled a home designer and builder who specialized in building very small functional homes of about 100 square feet. You can find more information on his website.

What this builder has realized, and what millions of Americans are just beginning to also realize, is that anything over 100 square feet or so per person is not a necessity; it is optional consumption, a want, instead of a need.

The US is not Switzerland, but Alan Drake has described how Swiss per capita oil consumption in the Second World War was about 0.15% of current US per capita oil consumption. They did it primarily by electrifying their transportation system.

I propose a sort of triage operation: "tiny" homes and multifamily housing along electric mass transit lines. In my opinion, it is the only way that we can preserve some semblance of a civilized society. The suburbs are, by and large, a lost cause.

32.6% of new US mortgages and home equity loans in 2005 were interest only, up from 0.6% in 2000

I was reading about mortgages today for work and came across this:

STRAIGHT-TERM MORTGAGES
Prior to the Great Depression of the 1930s, the straight-term or term mortgage was the common means of financing residential real estate. Under this method of payment, interest only is paid periodically (monthly, quarterly, annually) and the initial amount borrowed, the principal, is not paid until the last day of the loan period. Typically, term mortgages covered short periods of time--three to five years--and there was normally little intent by either the borrower to repay the principal or the lender to demand payment of the principal. The original amount borrowed was either extended for another term at an agreed upon interest rate or the borrower would negotiate with a new lender and pay off the old loan. However, as a result of financial conditions during the Depression and the National Housing Act of 1934, which among other things established the Federal Housing Administration, term mortgages became less popular. Borrowers during the Depression were unable to pay the principal when it became due. Because of the tightness in the money supply, lenders were unable to roll these loans over, and thus had to foreclose. Over a million families lost their homes during this time. The failure of the money market led to the creation of the Federal Housing Administration and increased usage of the amortized mortgage. Today, term mortgages are generally used only in the financing of land and construction.

Sounds familiar. I think this mortgage guide needs to update their info. They have this scary paragraph basically on why not to use straight-term mortgages, but fail to mention that almost 1/3 of new mortgages are done in this fashion.

What does this all mean for us?

Well, for starters, it means that we should buy the cheapest house we can fit into, and try to pay it off ASAP.

Debt is always VERY BAD. Especially because of the interest it costs you, month after month, year after year.

Thousands of dollars that could be yours, going to the banks.

Matthew