The rapid decline in oil prices brought good news for most Americans, who saw lower prices at their local gas station for the past several months. For those in the oil industry, particularly in energy hot spots like Texas, the news was not as well-received. The price drop has led to layoffs and uncertainty over the potential effect on new construction.
“Right now we don’t know how long it’s going to last,” says Patrick Jankowski, senior vice president of research at the Greater Houston Partnership (GHP), an economic development group serving the Houston area. “It looks like we’re in for 12 to 24 months with uncertainty and unease. But by 2017 we should be in good shape.”
According to a report from GHP, the spot price for West Texas Intermediate, the U.S. benchmark for light sweet crude oil, peaked at $107.95 a barrel on June 20, 2014. The price was $47.53 on March 24 of this year, which represents a decline of 56 percent. In January, crude traded as low as $44.45 a barrel.
Jankowski says prices on both ends of the extreme are unsustainable. Oil prices under $45 per barrel can’t and won’t last; at the same time, neither will oil above $100 per barrel. This leaves $70 as the magic number needed to stabilize the oil industry, and with it, a major portion of the Texas economy. More than half of the oil rigs that have stopped production so far are in Texas.
The oil industry filed 6,113 U.S. onshore drilling permits in January of 2014. Permits in January 2015 totaled 4,443, a decline of 27.3 percent. Analysts expect the industry to drill 10,000 fewer wells this year than last.
“We’re getting ready to find out whether Houston’s economy is diversified,” says Jankowski. “This is a test.”
What will be needed to achieve the $70 threshold is a global cutback of around 2 million barrels a day. Jankowski predicts several more oil rigs will be pulled up across the U.S. soon as a result of the low prices, helping balance the supply/demand equilibrium. Layoffs will come in the oil fields first and later reach higher-level employment such as office positions.
According to Jankowski, laid-off oil workers will be able to find jobs in fields like construction in large numbers due to a labor shortage. An example he cited is the number of chemical plants under construction in Houston, which will take three to five years to build.
Effect on construction
For those who remember the crash of the 1980s, Jankowski says the effect will not be nearly as drastic this time around.
“Between 1982 and 1986, we built 72 million square feet of office space in Houston,” Jankowski says. “From 2010 through 2014, we built 33.3 million square feet of office space. We have not overbuilt.”
Kevin Roberts, president of Houston-based real estate firm Transwestern’s southwest office, says construction in Houston will slow a bit during 2015, then recover in 2016 and 2017 after prices rebound. He’s confident the low prices will be relatively short-lived.
“Everybody’s going to get out of this thing alive, but no one’s going to get out unscathed,” says Roberts. “People can make money at $50 a barrel, just not as much as they can at $100 a barrel.”
The net effect of the price drop right now, Roberts says, is a “pause” in decision-making when it comes to constructing new developments across all property types.
Metro Houston created 120,600 jobs in 2014, a 4.2 percent increase over the previous year, according to the U.S. Bureau of Labor Statistics. It’s the second-largest annual employment gain and the 10th-fastest pace of job growth in the past 35 years.
So what does 2015 hold? According to GHP, the city of Houston issued a record $8.6 billion in construction permits in 2014, and those projects will take time to complete even though new ones may be slow in coming down the pipeline. Meanwhile, the region’s population is still growing, driving demand for housing, retail services, restaurants and healthcare.
“Jobs will be added in Texas this year,” says Roberts. “We’re seeing lots of activity on the office side. We are not in a recessionary period. We see a short period of uncertainty and a lack of decisions being made.”
— Haisten Willis