Mortgage Rates: Will Oil Prices Force Up Loan Costs?

There's been a lot of agreement that mortgage rates this year would reach five percent, a prediction which to this point has been wildly off the mark.

Rates at this time are clustered around 4.2 percent for 30-year, fixed-rate mortgages. But now -- for the first time in several years -- there's an objective reason why interest rates may suddenly and sharply go higher.

For a long time for the threat of higher energy prices has been off the table. America has vast reserves of coal and with the controversial practice of fracking we are now the world's largest producer of natural gas. With additional development from the Bakken formation in North Dakota and elsewhere it is believed that the United States could quickly become the world's largest producer of oil.

Increased domestic energy production is vital to the United States because it reduces the flow of dollars overseas and allows political flexibility. The alternative is what we see in Europe, an area dependent on Russian natural gas and thus an area without a lot of effective political muscle.

While the United States has increased its energy production during the past few years we have yet to achieve energy independence. We still import 7.7 million barrels of oil a day and thus the price of energy is very much tied to what bidders all over the world are willing to pay, including buyers in growing markets such as China and India.

Oil Prices and Mortgage Rates

What we pay for oil is essentially a tax on the entire economy. If the price of oil goes up then the price of just about everything else is impacted and this brings us to Iraq.

Iraq is the fifth-largest exporter of oil. Each day it sends roughly 2.2 million barrels into the world market. A major production center for Iraqi oil is the city of Mosul, a city which is now in the hands of Al Qaeda-affiliated guerrillas.

The world exports about 90 million barrels of oil per day and so it would seem that the small amount produced by Iraq and the smaller amount produced around Mosul would not have a great impact on world energy prices.

The problem is that world supply and demand are very closely matched. There is not a lot of instantly-available unused production capacity which means that small changes in supply or demand can have a very big impact on pricing. Moreover, oil is a commodity and speculators are constantly betting that the future value will rise or fall and thereby impacting prices.

You can see where this is going. A sudden interruption in the movement of oil could quickly impact world prices for just about everything. One of the prices which would surely rise is the cost of money, including mortgage rates.

Right now the real estate market is flooded with mortgage money, by one estimate lender vaults hold $2 trillion in "excess" cash. Lenders would love to create more mortgages and other types of financing with their idle cash but many are hesitant to make long-term commitments at today's rates. The result is a financial marketplace which on one hand is awash with capital while on the other is under-invested.

If there is any good news emerging from Mosul it's the reality that oil in the ground – like cash in a vault – is worthless unless it's put to use. Whoever controls Iraq has every incentive to sell its crude, otherwise the local economy will collapse and that's not good for revolutionaries of any stripe.

Get loan offers customized for you today.