Editing 2327: Oily House Index
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{{comic | {{comic | ||
| number = 2327 | | number = 2327 | ||
− | | date = July | + | | date = July 2, 2020 |
| title = Oily House Index | | title = Oily House Index | ||
| image = oily_house_index.png | | image = oily_house_index.png | ||
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==Explanation== | ==Explanation== | ||
+ | {{incomplete|Created by an OIL-FILLED HOUSE. Please mention here why this explanation isn't complete. Do NOT delete this tag too soon.}} | ||
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In economics, an {{w|index (economics)|index}} is a statistical measure of change in a representative group of individual data points. Common indices include NASDAQ (a measure of a range of stock prices) and a consumer price index (a measure of retail prices) | In economics, an {{w|index (economics)|index}} is a statistical measure of change in a representative group of individual data points. Common indices include NASDAQ (a measure of a range of stock prices) and a consumer price index (a measure of retail prices) | ||
− | This chart demonstrates an invented index, the " | + | This chart demonstrates an invented index, the "oily house index", which measures a ratio of oil price to average house prices, over time. |
− | The numerator is the average price of a new home (presumably in the US), in USD per square foot ($/sqft). It does not specify what kind of home, or where. One available metric is the [https://www.statista.com/statistics/682549/average-price-per-square-foot-in-new-single-family-houses-usa/ average price per square foot of floor space in new single-family houses in the United States] which was $118.91 in 2019. | + | The numerator is the average price of a new home (presumably in the US), in USD per square foot ($/sqft). It does not specify what kind of home, or where. One available metric is the [https://www.statista.com/statistics/682549/average-price-per-square-foot-in-new-single-family-houses-usa/ average price per square foot of floor space in new single-family houses in the United States] which was $118.91 in 2019. |
− | The denominator is the price of oil in USD per {{w|barrel (unit)|barrel}} ($/BBL). This is also not well defined, although the chart's caption suggests that it is based on crude oil. There are many different indices for different blends of oil in different locations, such as [https://www.investopedia.com/terms/w/wti.asp West | + | The denominator is the price of oil in USD per {{w|barrel (unit)|barrel}} ($/BBL). This is also not well defined, although the chart's caption suggests that it is based on crude oil. There are many different indices for different blends of oil in different locations, such as [https://www.investopedia.com/terms/w/wti.asp West Texs Intermediate], which is a crude oil commonly used as a global oil benchmark. (Others include Brent and Dubai Crude). The WTI price fluctuated around $55-60 throughout 2019. A barrel is a standard unit of oil volume, roughly 5.615 cubic feet or 0.16 cubic metres. |
− | The | + | The index is high when house prices are high and oil prices are low (such as during the 1999 oil glut), and low when house prices are low and oil prices are high (such as during the 1979 energy crisis). |
− | + | === Chart === | |
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;{{w|1979 oil crisis|1979 energy crisis}} | ;{{w|1979 oil crisis|1979 energy crisis}} | ||
− | :In the wake of the | + | :In the wake of the Iranian Revolution, global oil supply reduced by only 4%, but caused widespread panic and a huge increase in oil price. |
− | ;{{w|Gulf War}} | + | ;The {{w|Gulf War}} (August 1990 - Feb 1991) |
− | :The | + | ::The Gulf War (August 1990 - Feb 1991) was the invasion of Iraq by the US, which decreased oil supplies and caused a spike in prices. |
;1999 oil glut | ;1999 oil glut | ||
− | :In | + | :In 2014, a strong US dollar caused a global decline in the price of oil, which is generally traded in US dollars.[https://www.investopedia.com/ask/answers/030315/why-did-oil-prices-drop-so-much-2014.asp] |
;Ceiling height | ;Ceiling height | ||
:Reinforcing the connection with the metaphorical house filled with oil, "ceiling height" here is shown at somewhere just below 10 feet. The standard ceiling height in US homes is 9 feet for ground floor, and 8 feet on higher floors. [https://rethority.com/standard-ceiling-height/] | :Reinforcing the connection with the metaphorical house filled with oil, "ceiling height" here is shown at somewhere just below 10 feet. The standard ceiling height in US homes is 9 feet for ground floor, and 8 feet on higher floors. [https://rethority.com/standard-ceiling-height/] | ||
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;Oil and housing crashes partly cancel out | ;Oil and housing crashes partly cancel out | ||
:As a result of the {{w|financial crisis of 2007-2008}}, oil prices crashed from $147/BBL in July 2008 to $30 in December 2008. Meanwhile, {{w|United States housing bubble|falling house prices}}, which had partially triggered the financial crisis, continued to slump across the US, with the Case-Shiller home price index reporting its largest ever price drop in December 2008. Since both oil price and house prices were falling, the effect of dividing one by the other means that the index didn't change significantly, remaining around 8-15 feet. | :As a result of the {{w|financial crisis of 2007-2008}}, oil prices crashed from $147/BBL in July 2008 to $30 in December 2008. Meanwhile, {{w|United States housing bubble|falling house prices}}, which had partially triggered the financial crisis, continued to slump across the US, with the Case-Shiller home price index reporting its largest ever price drop in December 2008. Since both oil price and house prices were falling, the effect of dividing one by the other means that the index didn't change significantly, remaining around 8-15 feet. | ||
;{{w|2010s oil glut}} | ;{{w|2010s oil glut}} | ||
− | :In 2014-16 there was a serious surplus of | + | :In 2014-16 there was a serious surplus of crude oil, partially caused by increasing shale oil from the US and Canada, a slowdown in demand from China, and increasing fuel efficiency and use of renewable energy. Prices dropped from $125/BBL from 2012 to below $30 in January 2016. By October 2018, prices had recovered to $85/BBL. ] |
;OHI briefly became infinite as oil prices reached zero in 2020 | ;OHI briefly became infinite as oil prices reached zero in 2020 | ||
− | :In April 2020, the | + | :In April 2020, the coronavirus pandemic dramatically reduced vehicle and air transport, crashing oil demand. Oil prices actually went to zero, and even below, several times: oil producers paying consumers to take their oil, to avoid the costs of storing it.[https://www.afr.com/markets/commodities/oil-market-in-turmoil-as-price-falls-below-zero-20200421-p54lz3] Dividing anything by zero yields infinity, hence the "infinite oily house index". The graph should actually wrap around to the negative axis at this point. |
− | + | The comic then applies {{w|dimensional analysis}} to this index: dividing $/sqft by $/bbl yields a result whose dimension is a linear measurement, which can be called length. 1 barrel is 5.6 cubic feet. The average price per square foot of a new single-family dwelling in the USA in 2019 was about 119 $/sqft, while the price of oil in mid 2019 was about $60/BBL or $337/cubic foot. Dividing gives 60/337 feet<sup>-1</sup> or about 5.61 feet. (This doesn't match the value shown on the chart of around 15, so we have done something wrong here. :)) | |
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− | + | The chart's caption then interprets that length as the depth that a new home could be filled with the crude oil that could be purchased with its price. | |
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− | + | === Title text === | |
+ | The title text, "We're underwater on our mortgage due to the low price of water" is a pun. A mortgage on a property is considered to be "underwater"[https://www.investopedia.com/terms/u/underwater-mortgage.asp] when the value of the mortgage exceeds the value of the property. This is bad for both the owner (who owes more money than the property is worth) and the bank (who now have a loan which is not fully secured against a default: if the property owner defaults, the bank will lose money in selling the property). | ||
− | + | The title text is hinting at an alternative index based on the ratio of house price to the price of water instead of oil. If the price of water fell, then the index would rise, causing the house to be even deeper in water (following the metaphor of the index as filling the house with physical water). This situation could arise even if the property value remained high, although Randall may be humorously suggesting that the increase in the index would literally flood the property with water, which would then damage it, obviously decreasing its value. (If the index continues to be computed on average house prices, then this single event would not materially impact the index as a whole.) | |
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− | + | ==Transcript== | |
− | + | {{incomplete transcript|Do NOT delete this tag too soon.}} | |
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{{comic discussion}} | {{comic discussion}} | ||
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