Can the Boom Continue?

[jgriff]

the difference between 1980 and now is that the USA is producing nearly as much oil now as it was at it's peak in the early 70s (10 million barrels per day). The USA is producing more oil now than it has for the past 28 years. Until US oil production slows again, Houston's economy won't slow either (at least not as a result of energy).

 

If oil drops much more that's exactly what is going to happen. In fact it seems that this is the goal that the Saudis are trying to achieve. They can make money at $70 a barrel. At that price much of the production in the U.S. will stop because we can't make money at that price. It's much more expensive to produce oil in the U.S. than it is in Saudi Arabia. 

[arche_757]

And how long will the Saudi's keep it at that level?  Forever?  A year?  Three years?  Five years?  Doubtful.  They have other OPEC members who want to raise the prices!  Eventually they'll have to respond to those demands or risk whatever sanctions OPEC can give them.  They could even lose their seat at OPEC, which would mean they'd be hard pressed to adjust prices.

 

Besides, the current boom - from the "oil and gas" perspective is already drying up.  We've seen a lot less big office projects being announced of late - or haven't you noticed?  Like I mentioned before in a previous post, we will start to see more schools, hospitals, residential along with shopping developments crop up now.

 

Very doubtful we will see economic problems similar to what happened during the 1980s, I would think oil prices would need to drop to below $70 a barrel for a LONG time - quite a bit longer than 24 months - to see mass layoffs.

 

I'd say that its 100 times better to be in Houston right now than a Midland or anywhere in North Dakota!  We all remember how high prices were in 2006-2008?  Well... recession happened and Houston still grew, even added jobs despite the drop in demand and prices.  We will be fine, although the alarmists should heed their own advice and run for the hills!

 

Additionally even if the current boom in this town is mostly oil/gas related its brought enough new blood and ideas into town that the economy will eventually diversify more.  Perhaps that's overly optimistic?  I'd wager people from other places who may lose a job over lower prices might invest their $$$$$$ that they've been over paid by oil companies will do something else.  Some will leave, some will start new jobs/companies etc. here in town with others like themselves.

[samagon]

If oil drops much more that's exactly what is going to happen. In fact it seems that this is the goal that the Saudis are trying to achieve. They can make money at $70 a barrel. At that price much of the production in the U.S. will stop because we can't make money at that price. It's much more expensive to produce oil in the U.S. than it is in Saudi Arabia. 

 

Houston's economic growth will slow, no doubt, it will very probably level off. 

 

But the reason the price is dropping is because the USA isn't the only place that has these unconventional deposits available now.

 

http://oil-price.net/en/articles/oil-price-drops-on-oversupply.php

 

 Vast reserves have been discovered beneath the Eastern Mediterranean between Egypt and Greece, the South China Sea has yet to be fully explored and Brazil's estimates of off-shore reserves seem to rise monthly. Russia's threats to cut off gas supplies to Europe have removed all brakes on the development of fraking in Europe. The UK, Poland and Sweden are particularly keen to develop their resources. More oil has been discovered in the Arctic in territory belonging to Denmark and Russia and more shale oil lies beneath Russia than the US.

 

 

Where is the equipment to access these reserves going to come from? Make it themselves? No, they are going to employ (are employing) companies based in Houston that know how to build and design the equipment necessary to accomplish their goals. Except for Transocean, those guys moved to Switzerland. But anyway, they'll commission a company that knows what they are doing to build the components, and it will be shipped from the port of Houston to wherever it is needed. Look at companies like Cameron Drilling, Schlumberger, or any other company in Houston. They aren't exxon, or chevron, or the guys doing the production, they are the guys who make the equipment they use to do the production.

 

Not to mention all the energy trading that happens in Houston.

Not to mention all the pipeline companies that are based out of Houston.

 

All of this means that we aren't going to recess any time soon. Based on the amount of oil that's been found, maybe not in our lifetimes.

 

This assumes Ebola doesn't take out the entirety of the population of India and China along with a large chunk of Africa.

[H-Town Man]

The upshot of this might be that if Saudi production causes U.S. fracking and exploration to slow, the oil stays in there longer and pays more dividends down the road. Unlike what happened in East Texas where it was all gone in a few decades.

 

[Subdude]

The impact of oil prices on Texas, buried in a longer post:

 

 

Chapter 6 – The Texas Carry Trade  A rising dollar is going to put pressure on oil prices in particular and on energy prices in general. And falling oil prices have a strong secondary effect on Federal Reserve interest-rate policy. Pay attention, there will be a quiz.  Over at The National Interest, Sam Rines of Chilton Capital writes that Texas has been the engine of growth for the US for the past five years:  Job creation might be a good place to start. Texas has created jobs – there is little arguing that point. For instance, we know the U.S. economy only recently gained back the jobs lost in the Great Recession. This is not true of Texas. While the United States dropped about 6 percent of employment, Texas lost 4 percent and recovered them all by August 2011 – nearly three years before the United States as a whole.

Here is where the numbers get interesting. From its peak in January 2008 through today, the United States has created only 750,000 jobs. Texas created over a million jobs during that same period – meaning that the rest of the country (RotC) is still short 300,000 jobs. During the recovery, job creation has been all Texas or – at the very least – disproportionately Texas.

 

Choosing a different starting point – for example, in the trough of job losses – changes the extremity of the story. And there are all sorts of reasons for this disparity between Texas and the rest of the country, most of which miss the main point. In a conversation with Worth, Rines called the disparity the Texas Carry Trade. I like that.

The Texas story is by and large an oil story. We are far more diversified that we were in the ’80s, but oil is clearly the driver. Texas has been at the forefront of job creation because our borders happen to contain the mostly inhospitable scrubland known as the Permian Basin in West Texas, not to mention the coastal plays and those in East Texas. Much (not all) of the growth in oil has come from horizontal drilling and fracking. And while there are enormous amounts of energy in Texas, it is not necessarily cheap energy – not like it was in the “good old days.”

Seventy-dollar oil considerably restrains the enthusiasm of Texas oil companies, let alone the banks and individuals that finance them.

And it is not just Texas companies. The Marcellus play in the Northeast is responsible for hundreds of thousands of jobs. And it’s much the same story all over the US. Oil has been a significant portion of the growth of US GDP for the past five years. If you take the massive oil boom away, the US looks a lot like Europe in terms of growth and job creation. Which is to say, anemic.

Seventy-dollar oil starts to show up in the unemployment rate, which makes it more difficult for the Federal Reserve to raise rates.

I was talking with Joe Goyne, president of Pegasus Bank in Dallas. He is one of those entrepreneurial bankers who actually analyzes a loan personally rather than letting some computer determine whether it fits the criteria. (The country would be better off with a lot more Joes running the banking industry, but that’s another story.) Joe’s customers are a who’s who of Dallas. We were discussing my convictions about a strong dollar and what that would do to the price of oil. Joe offered, “You won’t believe the pain in Dallas if oil falls to $60.” We went on to discuss some details. Does $60 oil sound far-fetched? Joe and I both remember $15 oil. Texas has been through numerous oil busts. The running joke in the late ’80s was “Would the last person leaving Houston please turn out the lights?”

The late ’80s was an ugly time for Texas. Will the Saudis ever allow oil to dip below $60 again? Can they afford to cut their production that much? What will happen to Russia if Brent drops to $80, let alone $60? It’s not just Texas. And while the world might benefit from lower energy prices, they would create havoc in a few key regions. And throw another monkey wrench in Federal Reserve policy. And in terms of the oil price, gods forbid that peace breaks out in the Middle East. But, sadly, given current circumstances, it doesn’t look like we have to worry about that.

 

 

http://www.ritholtz.com/blog/2014/10/sea-change/

 

 

[mkultra25]

Oil prices in a somewhat wider context:

 

http://www.nytimes.com/2014/10/16/upshot/the-depressing-signals-the-markets-are-sending-about-the-global-economy.html?_r=0

[plumber2]

Slightly related to this is politics. Conservatives might claim that it is their policies that are the reason that the job market is so robust in Texas. I tend to think that the current economy has been moving along just fine despite state politics, conservative or liberal. One thing that did come up recently in a conversation with a recruiter at one of the TMC research facilities is that Texas conservative politics is an issue with recruiting efforts. Seems that the top newly graduated researches are choosing to go elsewhere. It appears like the Rick Perry's and Ted Cruz's of the world turn some people off. Folks tend to think that all of us here in Texas are a bunch of right wing cowboy boot wearing buffoons.

The economy in Houston and Texas will continue to grow, because of our location, available work force and low cost of living. Let's don't screw it up by trying to correct it.

[lockmat]

Check this out, Houston has more than three times office space under construction than any other metro, 15.6m square feet. Second is NYC with 5.4m. I'd be very pleasantly surprised if any more office projects are revealed in the next year or so.

Wow

http://www.us.jll.com/united-states/en-us/Research/JLL%20-%20U.S.%20Office%20Outlook-Q3-2014.pdf?40202a31-f6b4-462e-90a3-a94327565541

[bachanon]

Remember, Houston's growth isn't only about oil; it's about natural gas and extraction technology; it's about medicine; it's about increased trade via the port of Houston; it's about manufacturing and refining.  Several billions of dollars are being invested in new chemical refineries for oil based products (which are not gasoline).  Also, Houston is increasingly seen as good place to live.

The boom is not riding on oil alone.

[Sparrow]

I'm not an economist, but couldn't an economic slow down help local development with respect to materials and labor sourcing? What I mean is there has to be some developments waiting in the winds not getting off the ground yet because they can't make the economics work, not because of lack of demand, but rather the high construction costs due to the general resurgence of the nation as a whole.  

[august948]

I'm not an economist, but couldn't an economic slow down help local development with respect to materials and labor sourcing? What I mean is there has to be some developments waiting in the winds not getting off the ground yet because they can't make the economics work, not because of lack of demand, but rather the high construction costs due to the general resurgence of the nation as a whole.  

 

Could also be that some projects are getting delayed due to not enough construction workers and contractors available to do all the work at once.  A little slowdown might help ease the backlog.

 

[Houston19514]

Remember, Houston's growth isn't only about oil; it's about natural gas and extraction technology; it's about medicine; it's about increased trade via the port of Houston; it's about manufacturing and refining.  Several billions of dollars are being invested in new chemical refineries for oil based products (which are not gasoline).  Also, Houston is increasingly seen as good place to live.

The boom is not riding on oil alone.

 

and part of the boom is riding on low natural gas prices.

[Tower26]

The boom will most likely to continue . 

[august948]

Found this in the chron today predicting WTI at $70 and Brent at $80 next year...

 

http://www.houstonchronicle.com/business/energy/article/Crude-to-fall-to-70-next-year-report-predicts-5851501.php

 

 

Still, the continued drop in crude oil prices - at their lowest level since 2012 - is unlikely to cause an immediate slowdown in activity in U.S. shale plays. Molchanov said there's a misconception that if WTI is around $80, U.S. shale plays won't be profitable and drilling will dramatically slow.

He said the break even point in many U.S. shale plays is well-below $70, and in some places, it could be below $50. "So the (profit) margins are lower today," Molchanov said, "but the wells are economic."

 

[Howard Huge]

I'm not an economist, but couldn't an economic slow down help local development with respect to materials and labor sourcing? What I mean is there has to be some developments waiting in the winds not getting off the ground yet because they can't make the economics work, not because of lack of demand, but rather the high construction costs due to the general resurgence of the nation as a whole.

Well put.

Especially the port, which is going to see a huge increase in traffic when the widening of the Panama canal is complete.

The monster ships will no longer have to drop off at a california port and truck cargo to the east coast, they will be able to reach Houston directly soon.

[Timoric]

-

[Howard Huge]

I don't know this but I have to think the port is the reason our GDP is so high compared to other cities. I remember in the 1980s it was something like 70 or 80 percent of the economy was based on oil, after the bust we saw the Medical Center touted (for example remember reading it was the greatest concentration of construction in the United States at one time, like $3.5B) and Diversification was the mantra. I would love to see a pie chart of todays economy in Houston, gotta think it is still like 50 percent because when something booms it takes up a bigger slice.

Well, I know the port already leads the nation in foreign tonnage, the canal widening should really solidify our position as a United States mega port.

[bachanon]

and part of the boom is riding on low natural gas prices.

 

http://www.bizjournals.com/houston/morning_call/2014/04/chevron-phillips-kicks-off-6-billion-construction.html?page=all

 

isn't the low price of natural gas the reason chevron phillips is spending 6 billion dollars on cracker facilities to produce cheaper plastics.  low natural gas prices have provided an opportunity that chevron phillips and others are aggressively pursuing.  once again, the boom is not riding on the price of oil or natural gas alone; it is happening partly because of the opportunity of readily available resources that have not been so readily available before.

[UtterlyUrban]

With their most recent cut in prices -- specifically targeted for North America -- The Saudis want to choke off some US domestic production. When they do, the U.S. shale fields will get the sniffles and Houston will get a cold. TheWSJ had a very good article about a week ago showing the relative costs of production in the various shale fields. Some will be fine at $70 a barrel. Others will hurt. The Saudis know this too. And that is exactly what the Saudis want.

For the first time since moving here a bit ago, I sat around the table with several business colleagues and each of them said: "you were smart to rent......."

[bachanon]

With their most recent cut in prices -- specifically targeted for North America -- The Saudis want to choke off some US domestic production. When they do, the U.S. shale fields will get the sniffles and Houston will get a cold. TheWSJ had a very good article about a week ago showing the relative costs of production in the various shale fields. Some will be fine at $70 a barrel. Others will hurt. The Saudis know this too. And that is exactly what the Saudis want.

For the first time since moving here a bit ago, I sat around the table with several business colleagues and each of them said: "you were smart to rent......."

 

if oil prices were the only factor, your colleagues might be right.  demand for housing and the population in houston were growing before the shale boom was in full force.  the shale boom is producing oil and natural gas.  the cheap oil and natural gas provide resources that do not have to be imported for use in making by-products. the demand for housing in houston is more than double what the construction industry can produce.

i do not remember whether the WSJ article discussed the natural gas coming out of the shale fields or not; this too is a factor in the overall energy boom.

[Slick Vik]

if oil prices were the only factor, your colleagues might be right. demand for housing and the population in houston were growing before the shale boom was in full force. the shale boom is producing oil and natural gas. the cheap oil and natural gas provide resources that do not have to be imported for use in making by-products. the demand for housing in houston is more than double what the construction industry can produce.

i do not remember whether the WSJ article discussed the natural gas coming out of the shale fields or not; this too is a factor in the overall energy boom.

The shale boom is temporary. What people don't realize is over time all that energy will be exported via LNG and at that point it will have little benefit to those except energy companies.

[Tower26]

Keep a heavy eye on the port . 

[brian0123]

I know people in the energy sector tend to think the world revolves around them, but I'll remind everyone again that the Medical Center employs a 106k (and rapidly growing) workforce alone. That's not to mention all the growing hospitals in surrounding burbs. If anything,I think the lower oil prices could impact the energy corridor and Woodlands (really any far flung office space geared towards energy)... but it will take oil bring cheap for a long period. Houston itself is much more economically diverse than it has ever been. UtterlyUrban, if you're planning to stay here a couple years... you really should consider buying (if in an urban area). There's only so much land to go around.

[lockmat]

Fertita thinks a bust is coming, and names Houston specifically

http://mobile.bloomberg.com/video/tilman-fertitta-real-estate-crash-like-1986-coming-j2rFvvu~Rbq87Gyv1G9Ryw.html

[august948]

Fertita thinks a bust is coming, and names Houston specifically

http://mobile.bloomberg.com/video/tilman-fertitta-real-estate-crash-like-1986-coming-j2rFvvu~Rbq87Gyv1G9Ryw.html

 

His argument seems to be that real estate is way overpriced, particularly in NYC and Houston (two towns he mentions specifically) and so the markets are due for a correction.  The particular example he gave was a hotel somewhere someone paid $1.3B for and that by his rule of thumb they would need to average $1,300 per night which is more than the market can bear.

 

So, is Houston real estate really way overpriced right now?

 

[Slick Vik]

I know people in the energy sector tend to think the world revolves around them, but I'll remind everyone again that the Medical Center employs a 106k (and rapidly growing) workforce alone. That's not to mention all the growing hospitals in surrounding burbs. If anything,I think the lower oil prices could impact the energy corridor and Woodlands (really any far flung office space geared towards energy)... but it will take oil bring cheap for a long period. Houston itself is much more economically diverse than it has ever been. UtterlyUrban, if you're planning to stay here a couple years... you really should consider buying (if in an urban area). There's only so much land to go around.

Medical center is a small percentage of the economy. This is an oil city period.

[august948]

Medical center is a small percentage of the economy. This is an oil city period.

 

It's a win-win...if oil and gas stay profitable (which it probably will) then we continue to boom.  If oil goes way down, we can all buy SUV's.

 

[LarryDierker]

It's a win-win...if oil and gas stay profitable (which it probably will) then we continue to boom.  If oil goes way down, we can all buy SUV's.

 

 

and brand new shiny high rise apartments?

[august948]

and brand new shiny high rise apartments?

 

Or houses in the sprawling suburbia that won't be collapsing any time soon.

 

[LarryDierker]

Or houses in the sprawling suburbia that won't be collapsing any time soon.

 

 

Why not both?

 

Seriously though, will keystone pipeline approval benefit Houston's economy?