The connection between the world’s political events and mortgage rates here at home is not always clear, but Russia’s invasion of Georgia provides a strong working lesson.
Georgia is a former Soviet republic on the eastern shores of the Black Sea. Oil pipelines within its territory supply about 1 percent of the world’s daily oil needs, mostly to ports in Western Europe.
Last week, Russia bombed Georgia’s oil and natural gas transport systems. None of the bombs struck the pipelines, but several exploded close to it. Pipeline part-owner BP shut down two of its oil lines as a precaution, but Russia is reported to have struck one of BP’s other pipelines this morning.
The cost of oil is generally based on the normal economics of supply and demand so when oil supplies are threatened, damaged, or shutdown — because of war, weather or otherwise — oil prices respond by moving higher.
Higher oil prices, of course, are considered inflationary and that causes mortgage rates to rise here in the United States. High oil prices, for example, are one reason why mortgage rates spiked throughout June and July of this year. And as oil prices have settled, rates have calmed a bit, too.
It’s easy to ignore politics and news when it’s not happening in your own country, let alone your own hometown. But that doesn’t make it any less important.
When you’re buying a home, or thinking of refinancing one, you’ll likely need a mortgage and the rate you pay on that mortgage will be influenced by every geopolitical event in the world.
Especially when the event involves oil.
Russia-Georgia conflict raises worries over oil and gas pipelines
Los Angeles Times, August 13, 2008