THE PRICE OF CRUDE OIL HITS RECORD LEVELS! What a sound bite. The media reporters, pundits and talking heads can’t say it often and loud enough. That’s called quantitative reporting. You get the information and that’s it. It’s dramatically presented with a negative bias, the reason being that drama sells and the media has a negative mindset.

Information and its affects are analogous to dropping a pebble in a pond. Everyone can see the first ripple. Fewer and fewer people see the furthest ones. It is the philosophy of NetGain to see the furthest ripple and take that information to the next level. That means explaining what the affects are and how to use them for your benefit. In our case the focus will be on commercial real estate investment.

In qualitative analysis, first we go to “the what”. What’s in a barrel of crude oil (barrel) and what does it produce? Including additives, a barrel is approximately 48.4 gallons. After refining, the main ingredients in gallons are as follows: Gasoline at 19.5; distillate fuel oil (includes both home heating oil and diesel fuel) at 9.2; kerosene-type jet fuel at 4.1; and residual fuel oil (heavy oils used as fuels in industry, marine transportation and for electric power generation) at 2.3.

What’s the significance of the current price per barrel? It’s a record high! In 1981, during the Iran/ Iraq war, crude reached a high of slightly over $60 a barrel. Ten years ago it was $18 a barrel. Five years ago it was $23 a barrel.

Now let’s drop the current record price per barrel into the pond and see the ripples.

The main ingredients produced from a barrel affect both the business community and the consumer. Some of the company types affected in the business community are those that involve airlines, trucking, automobiles and all the cottage industries that support their activities. Although the impact on these businesses is significant, NetGain’s real interest is the affect that the current price per barrel will have on consumers. It is consumers that account for 70% of our Gross Domestic Product (GDP), and it is consumers who live, work and shop at the core types of commercial real estate: Residential, office and retail.

The record price per barrel will affect consumers two ways. First, more money will be spent to heat and/or air condition homes. Second, consumers will spend less time in their cars. The first means they will have less money to spend. The second means they will change how they spend their money. In other words, the American consumer has less money to spend and is changing their buying habits (see Figure 1).

Figure 1

Those changes will have the largest reaction on retail properties. The consumer will still shop, but will have an alternative: The Internet. Following are the Census Bureau of the Department of Commerce estimates announced on November 19 for U.S. retail and e-commerce retail sales for the third quarter of 2007.

Third quarter 2007 compared to second quarter 2007:

E-commerce retail sales adjusted were $34.7 billion, an increase of 3.6 percent (±0.8%) from the second quarter of 2007. Total retail sales for the third quarter of 2007 were estimated at $1,020.4 billion, an increase of 0.8 percent (±0.2%) from the second quarter of 2007.

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