Spindletop, back in the day when a gusher was simply a good thing.
Spindletop, back in the day when a gusher was simply a good thing.

How Scared Should Houston Be About Low Oil Prices?

It's hard to believe that once upon a time, the wise sages of energy were saying that Texas would never see another oil boom and the United States as a whole would run out of oil sooner rather than later. Well, those sages were wrong because not only has there been a boom, we now might just be in the midst of a pretty epic bust. Maybe.

Things seem relatively quiet within the oil industry right now, but the odds are good that with prices still hovering in the $40s, the calm won't last long. Low oil prices have been hitting Houston since January with announced layoffs paired up with a general unease in the air. Home sales have fallen for the first time in years, and some are saying that there won't be enough people coming in to rent the apartments that have been sprouting up across the city.

"There's a lot of whistling past the graveyard in Houston real estate right now, but by the third quarter this year, everyone is going to be convinced the end of the world has come," Bill Gilmer, Director of the Institute for Regional Forecasting in the University of Houston Bauer College of Business, says. "Right about then, we'll be stunned by how far the price has fallen and asking why we haven't diversified like we thought we had. About that time when we feel absolutely the worst, the turn will come."

The low oil prices have already been translating into tough times for people who work in the white-collar side of the oil industry. Layoffs started with the service companies, but almost every energy company will be cutting people from its payroll as the low oil prices continue. "It's a complicated story right now. First of all, we are going to get hit and we're going to get hit hard by the declining oil prices. If that was all that was going on, we'd have a mild recession on our hands and lose maybe 65,000 to 70,000 jobs. But that's not all that's going on, so it's not that simple," Gilmer says.

It's hard to say as of right now how many job losses that will ultimately amount to, but Gilmer points out that the loss of white-collar jobs translates to at least four other jobs connected to that one paycheck. People with these jobs are making $140,000 a year, about double what the average person is making, so these jobs are indirectly supporting about four other jobs outside of the industry entirely -- the people that these people hire. Once that job is gone, it will have a ripple effect on the other people indirectly connected, he says.

The cuts will also be felt by the companies that do business with energy companies, he says. Energy companies have already been trimming their sails in the obvious ways, by announcing layoffs and cutbacks on capital expenditures and investments. But energy companies contract out a lot of legal work, accounting, even the custodial work on their buildings. Companies can and thus most likely will cut back on some of these services, a way of trimming the budget without having to get all formal about it. All of this means that the people with direct ties to energy (and those who work for them) are going to be feeling the pinch. "On the west side of town, in the white-collar areas, the Energy Corridor, this is going to feel like a mini-recession," Gilmer says.

Across Texas, there are more troubling implications indicated by the sharply declining rig count. The rule goes that every rig in the field supports between 200 and 300 jobs. "So far the rig count has dropped 40 percent, and there are jobs tied to those rigs from servicing them to the people who serve them in the local drugstore. Those cuts probably haven't happened yet, but the way this is set up has baked into the pie the loss of these jobs," Gilmer says.

However, all hope is not lost, at least as far as Houston is concerned. Even though the white-collar layoffs will have a pretty far reach in Houston, the cheap energy is translating into a boon for construction in the area. It may not do a lot of good for the laid-off office workers, but it will help those who have been working on the blue-collar side of oil, he says. "We're going to pick up a lot of jobs on the east side of Houston, the blue-collar workers. An absolutely unprecedented amount of construction is under way. There are huge chemical plants being built down here on the premise that energy prices are low. Between the momentum we've had from the years of high-priced oil plus this activity, we'll probably end up with 50,000 more jobs in Houston."

Meanwhile, there are still rumblings in the national oil industry and from the global market to cause some alarm. Despite the sharp drop in oil prices since last June, U.S. production is still booming at an almost record 32-year high of 9.4 million barrels per day, according to the Energy Information Administration. In some parts of the world, like Saudi Arabia, for instance, the oil fields are very localized and the production levels are relatively easy to control, since the Saudis tell their people to produce less and that's what happens.

But things don't work that way in the United States, so even though the glut of U.S. oil being produced is part of what is driving the price ever lower, producers haven't stopped producing. The EIA is predicting that U.S. oil producers are going to outdo themselves in 2016 by getting production levels up to 9.6 million barrels per day, which would be the highest U.S. production since 1970. That's a lot of oil sloshing around the market.

Adding another wrinkle of complication is the storage question. Right now, some U.S. oil companies are choosing to store their oil rather than put it on the market, in the hope that the price will be better by the time they choose to sell. But the problem comes in because we're producing a lot of oil around here and storing it, which is a problem, because the true amount of oil being produced hasn't hit the market yet. "There's a huge amount of storage available," Gilmer says. "It's just delaying the whole price-correction process with speculators filling all those tanks up at $50 a barrel. We need to see the storage filled up, because once it is, that will force people to slow production, the ultimate correction."

And why is there so much oil sloshing around despite the rock-bottom prices? Well, for one thing, this isn't Saudi Arabia so the market does its own thing. Some companies have continued to produce because they don't want to forfeit their leases, and some companies are continuing to produce, even operating at a loss, because they're hoping others will drop out and they'll be left standing and have the advantage, Bill Arnold, professor of energy management at Rice University, says. "Oil exporting has been banned for years, so it's either storage or sale. Once all the storage is filled up, that oil will still be coming up out of the ground and it has to go somewhere. If companies don't have the storage option, they'll have to sell it or leave it on the ground."

At the same time, it's impossible to know for sure if this will happen or if something will change with the global dynamics of the oil industry to reshape the whole situation, he says. Right now, a lot of U.S. oil people are concerned about the potential deal with Iran that would drop sanctions and allow the Iranians to send about 1 million barrels of oil into the global market overnight, Arnold says. When the first signs of shakiness in the oil industry started to show last summer, most people assumed that OPEC, led by the Saudis, would ease off on its production, acting as the swing producer who controls the market, the way it always has. But OPEC didn't do that this time.

Some analysts like to claim they saw this coming, but Arnold admits he didn't imagine that oil would fall below $50 per barrel. But China's need for oil didn't keep growing the way everyone had predicted it would, and in India the need also softened, Arnold says.

At the same time, aside from the unprecedented U.S. shale oil boom, Iraq has the highest level of production seen in that country in 35 years, he says. Somehow Libya is still producing oil, and Brazil is also a player. The market has always been complicated and hard to predict, but right now it's impossible to say what will happen going forward. "This crisis is different from the previous ones," he says. "In this case we're dealing with an increase in production, principally in the United States, along with softening world demand. The conditions are different, so the outcome could be different."

For Houston, a city that has, for better or worse, had plenty of experience with the boom-and-bust cycle of oil, the whole thing could end up being a test of our much-vaunted diversification, he says. "In 1986, the tentacles of the bust were so far-reaching that the Texas Medical Center felt it immediately with a massive drop in elective surgeries. Universities substantially cut back on their petroleum engineering courses; everyone backed away," Arnold says. "We've said the city is dramatically more diversified now, but this will be a test of this diversification."

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