It's the Oil, Stupid!

(Post #1000) by an Un-Civil Engineer:

Forget gold, oil is the driver of the U.S. economy.  The entire economic system is based on cheap oil.  In my other life (i.e. the one I take seriously because it pays my bills), I work as an (un-)civil engineer.  After 10 years, I am proficient in many aspects of the profession.  I am probably most successful as a cost estimator.  My specialties are heavy civil and structural construction cost engineer's estimates, and materials costs in general. As a consequence, it is necessary that I closely follow Construction Economics.  I also write about it.  Today, for reasons that will become obvious, I will do so here.

As a huge employment sector in the U.S., the construction industry has been particularly hard hit by the "Depression" in the construction market.  The residential and commercial real estate markets are in the toilet.  Heavy civil is limping along.

Construction workers have an official unemployment rate more than double that of the country as a whole.  As many workers in this sector were either self-employed or working under the table, in addition to the numbers being skewed by statistical manipulations (such as not counting those whose unemployment benefits have expired as no longer "unemployed), the number is surely far higher.

The competition for work is brutal.  Many construction firms are not currently bidding to make a profit, but merely to stay in business.  This weak economic climate is a period where it is definitely advantageous to be in an "owner" role, as bids are falling to 2003 or earlier levels.  This situation has only been made possible due to the low cost of oil and other commodities brought about by demand destruction in late 2008.  A combination of low bids and suddenly rising commodities prices will stall many construction projects and/or force firms to "eat" the difference.   (Contracts that contain materials escalation clauses can help to mitigate this problem and can even work as a two-way street: if prices fall the owner keeps the difference.) Weaker firms will eventually fail, thus raising unemployment in the sector even higher.  The  result will be a few large firms standing, and costs will again rise due to lower levels of competition.  The big boys will dominate the market.

Although the escalating cost of oil dominates the headlines, other construction related commodities, such as steel, have risen rapidly in the last three months.  Is this due to higher demand in the US?  The AGC says no.  Although there is increased demand from some foreign markers, it appears that speculators are moving back into commodities from the bond markets.  However, the cost of oil plays a factor.  If energy is more expensive, then production, fabrication and shipping costs rise as well.

Oil is rising for several reasons beyond speculation.  Many countries realize that it is a finite resource (at least as far as easily accessible oil is concerned), and are reacting accordingly.  However, this does not explain the huge jump in the last 3 months.  I (and many others) believe this is driven by the so-called QE2 instigated the Federal Reserve at about that time.  QE2 is an attempt to stimulate the economy by lowering the dollar in an attempt to increase US exports.  (Some might ask, "What exports?!?")  As commodities are priced in dollars, any move to weaken the dollar will inevitably raise costs.   Hence, QE2 will only serve to batter the construction industry even harder.  At least the stimulus, for all its glaring flaws, kept it from sinking entirely.  And, of course, the rising cost of oil will sink others as well.  The incompetence of the likes of Bernanke is amazing...  (If I was as wrong as he is, I would be out of a job.)

So what's so controversial about what I wrote above?  In my view, absolutely nothing, but I have found it almost impossible to get anyone involved in setting policy to listen.  They don't want to hear that the Federal Reserve is undermining a large US industry.  Even as the data tells them otherwise, they would rather smoke the dope of some imaginary recovery.  I once even started a serious blog (under my real name), which included alternative sources beyond the MSM of economic analysis, but gave it up.  At first interest was high, but once it became obvious that I did not tow the line of "recovery," I lost most of my readers.  (Yet none of my posts were beyond the above in tone.)  I quit soon thereafter.

Hence, it is better to have fun with art (even if nobody cares) than scream at a wall (where nobody cares), and I will certainly "keep on keepin' on" here.