Houston, Where Low Oil Prices Equal a Strong Economy

04/24/2017

The fall in oil prices over the past few years impacted Houston in a completely different way than many expected—a way that is leading to renewed job growth and economic expansion. Our Senior Vice President of Advisory Scott Davis recently spent some time analyzing why and how the Houston economy continued to grow over the past few years, in spite of what many thought could represent major trouble for the region. Access full interview with Scott documented on SoundCloud or press the play button in the SoundCloud player above, meantime key themes are documented below.

A BRIEF HISTORY OF THE OIL SLUMP

It was more than two years ago that oil began its dramatic slide from over $107 a barrel for West Texas Intermediate (WTI) crude all the way down to less than $28 a barrel in February, 2016. Houston went from the nation’s indispensable economic engine—at one point during the early recovery, one out of every three jobs created nationally was created there—to a market some said should be avoided at any cost. Almost overnight the Houston MSA went from creating over 100,000 jobs per year to less than 5,000 in 2016. One local economic expert even suggested the Houston market was in a recession in early 2016. In fact, the resulting decline in energy prices and the rig count is comparable to what happened in Houston during the early 1980s.

However, even during these challenging economic times, Houston displayed its deeply-engrained vigor. The market never lost its position as the nation’s leader in single family permits, and in 2016 set a new record for existing home sales, surpassing the total sales in 2014—when the market had created over 110,000 jobs.

FASTEST GROWING INDUSTRIES? MINING & MANUFACTURING

Much of the world rightly considers Houston the “energy capital”;  in many ways nearly half of the economy is dependent on energy. Upstream energy—industries related to finding, extracting and producing oil—and the manufacturers that build the equipment they use lost in excess of 30,000 jobs from 2015 to 2016. But Houston also has a thriving medical community, and health care related sectors have been leading job creators over that same time period. As oil prices stabilized around $50 a barrel, energy and manufacturing sectors have also quickly stabilized. The Dallas Federal Reserve Bank has determined that mining (up 7.8% in Q42016) and manufacturing (up 5.4% in Q42016) are again the region’s two fastest growing industry sectors.

BETTER TECHNOLOGY IS IMPROVING EFFICIENCY 

Why the growth, in light of oil prices hovering at roughly half their 2015 levels and no signs of notable improvement? Faced with a severe challenge from oil production by OPEC, particularly Saudi Arabia, Texas oil producers began to innovate. Not every firm survived—more than 100 energy companies declared bankruptcy. But those that did drove down the breakeven wellhead price of oil (particularly oil shale) dramatically, as illustrated in Exhibit 1 below.

In 2013, breakeven wellhead prices for domestic oil production ranged from $68 to $98 per barrel, which was sustainable only in a market that was looking at $100+ per barrel. Today, oil can be can be produced at anywhere from $28 to $39 a barrel—a notable change. How have they done it? Technology. There is no question that labor and materials are cheaper today, but technological advances have played a much greater role. Did you know that Houston is the country’s number two market (behind the Silicon Valley) for H1B visa workers? Energy is the technology space where those workers operate. Oil companies have been using data analysis to better understand the capacity of these reservoirs and how to more efficiently extract more oil with the same equipment. Exhibit 2 illustrates the dramatic increase in the number of barrels of oil per day per rig increased in recent years.

Texas, and particularly Houston, has been the key beneficiary of this development. Texas produces about 75% to 80% of US shale oil, and is finding increased investment in shale opportunities. This leads to more energy and total economic growth in the Houston market. In fact, the investment outlook for energy in Texas led the US Energy Information Administration to project that 2018 will be a record year for US oil production, surpassing the previous peak set back in 1970.

How will this translate into new housing development in Houston? Our model is forecasting a 5% to 10% increase in new home sales in the Houston market for 2017, and many of our clients are reporting year-over-year increases in excess of that for the first quarter.

To find out more about how to thrive and profit in the Houston housing market, please contact us.

Scott Davis, Senior Vice President – Advisory Houston
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