I. Why Oil Prices Are Not Spiking (and…Thank God, They’re Not)
The last time the Iran war heated up like it is now, oil prices surged to over $100 per barrel. But today, West Texas Crude hovers in the $82 range.
Oil prices are not rising this time, though, for three reasons: (1) there are still about 7 million barrels of oil making it through the Strait of Hormuz; ships just have their transponders off, so they can’t be tracked; (2) there are another 7 million barrels avoiding the Persian Gulf (Iran) altogether with a pipeline that is carrying oil to the Red Sea; and (3) demand is way lower than it was pre-war – as the world economy is slower and China is importing a lot less.
Hence, 14 million barrels are still making it out of the Persian Gulf – 70% of the 20 million barrels making it out before the war. (Thank you, Barry Habib, for this).
If oil prices were spiking again, rates would be much higher.
II. Joe Rogan Wants the Government to Take Over Oil Companies Because Gas Prices Aren’t Falling… (Sigh)
Whenever oil prices fall, and gas prices don’t, the likes of Joe Rogan, Tucker Carlson, and Senators Warren and Sanders all start complaining about “greedy oil companies” and how we need to nationalize oil companies (Joe Rogan actually called for that) and/or regulate them into submission.
Here are a few things they don’t understand:
1. The gasoline market is extremely competitive. If Chevron jacks up its prices, Shell, Valero, Citgo, Conoco, Circle K, Arco, 7-Eleven, and Buc-ees (because, of course, Buc-ees) will step in and sell gas more cheaply. This is something the “price gouging” crowd never seems to understand. Nobody can price gouge in a competitive fragmented market because they will lose business to competitors …. every single time.
2. The gasoline market is separate from the oil market. Yes, oil is a major input – but only accounts for half the cost of gasoline. Refinery costs and capacity are other major factors, and right now there is just too little capacity worldwide thanks to Ukraine’s attacks on Russia, Gavin Newsom’s attacks on California, and overall capacity constraints.
3. When countries nationalize oil companies, production plummets… every single time. Venezuela is the poster child for this, as production fell from 3.5 million barrels to 400,000. Mexico did not fare much better. And no, the U.S. could not do a better job because “we’re special.” The incentives are always wrong when governments get involved.
4. Regulations to keep prices lower – in the face of the above-listed ignorance – just result in shortages and then higher prices… every single time. See the 1970s for example. Or see what happens with rent controls. Or see CA’s utilities.
III. Assuaging Payment Shock – Part II
On Friday, I posted this blog: “Net” Payment After Taxes – Why Tax Cuts Killed The Mortgage Industry. And – I got a ton of feedback, pointing out things I missed.
I posted the blog once again because we spend so much time assuaging payment shock – when first-time homebuyers are moving from $3,500 in rent to a $6,000 housing payment.
I focused on tax benefits in my blog, but I missed a few things I should have mentioned:
- Mortgage insurance is tax deductible again (both PMI and FHA’s MIP), thanks to Trump’s One Big Beautiful Bill (but only if income is below a low threshold).
- The State and Local Tax (SALT) deduction limit was increased to $40,000 (for a married couple) – up from $10,000 – in that same bill.
- Mortgage interest deductions are still limited to $750,000 of acquisition debt.
- THE BIGGIE: We need to remind borrowers that a big chunk of their housing payment is principal repayment – which is effectively savings or a payment to oneself.
Long story short: I still recommend using Claude to estimate tax savings by giving it (1) a purchase price, (2) a down payment amount, (3) an interest rate, and (4) a property tax rate.
Assume we have a couple – making $300,000 – and buying a $1 million home in CA with 10% down, a 6.5% rate, and a 1.3% property tax rate – giving them a payment of $7,500ish (depending on insurance and PMI rates).
This couple will save about $12,000 in income taxes, reducing their net effective payment by $1,000.
But that couple will also be paying down about $840 of principal every month in their first year – making their net effective payment even lower.
And, as we all know, that principal contribution will grow with every payment.
