The Housing Chronicles Blog: What happens to real estate development if oil production has peaked?

Saturday, December 1, 2007

What happens to real estate development if oil production has peaked?

One of the reasons that oil has been pushing up towards the $100 level is because production (at least of the better-quality crude) has had trouble keeping up with supply. While the Internet abounds with articles and websites predicting a post-oil economic apocalypse, it's when a mainstream source like Time magazine takes on the subject that a potential tipping point of public awareness has passed. A longer story in The New York Times from 2005 explores the issue in even better detail, whereas an interview with Chevron CEO David O'Reilly in the 12/10/07 edition of Fortune magazine has him concluding that both high oil prices and our energy dependence on it are here to stay for some time (perhaps decades). And what about renewables? Not as fast as some would hope (video interview).

People often confuse the current oil prise rise with the gas shortage of the 1970s, which then was due to a politically motivated and human-created embargo. Even if there's still plenty of the black gold to be had today, supply constraints due to political turmoil, technology, money to invest, too few qualified engineers and declines in current oil fields has even some oil company CEOs predicting that production will never eclipse the 100-million-barrels-per-day level even though demand will rise to 110 million barrels by 2030. With China, India and other upwardly mobile countries now competing with the U.S. for the limited supply (which may plateau for a long time instead of peak), gasoline prices may eventually rival those in other Western European countries, which currently approach and exceed $6 per U.S. gallon.

What would that do to our country's love of suburban development and the long commutes often required to maintain that lifestyle? Clearly, access to mass transit will be a key decider in new home purchases -- probably as much as school districts are today with families who have children. Infill and mixed-use development -- now becoming increasingly popular, especially in traditionally car-dependent areas of California -- will become even more mainstream for some of the larger builders, some of whom will be obliged to throw out out their "repeat as often as necessary" business models in favor of unique projects (and floor plans) that are specific to each site. Transit-oriented developments, currently seen more as a novelty than a required convenience for many buyers and renters, will also rise in importance.

In each case, feasibility studies will take on a micro-market focus and builders will need to make the case that new homes, with all of their benefits, are worth more than a nearby resale; simply reviewing countywide stats and hoping that the demand is there will simply no longer suffice.

No comments: