In Houston, where oil and gas companies and related industries power millions of jobs, an energy-centric perspective underlies most business interactions. But several factors have helped energy become a hot topic around the world:
– At-the-pump prices hitting all-time highs here and abroad.
– A crippling economic downturn.
– Fresh memories of Hurricane Ike’s impact on refinery output and gasoline distribution.
– An impending U.S. presidential campaign with energy policy as one of its dominant themes.
Increasingly, the world’s top publications and government officials have relied on a professor from the University of Houston C. T. Bauer College of Business — arguably the country’s most sought-after energy markets expert — to analyze the factors that drive energy markets and more.The Wall Street Journal, The Washington Post, The New York Times, Fortune magazine, CBS News, Reuters, Newsweek and CNN are among the major news outlets that have sought out Dr. Craig Pirrong, Professor of Finance and Director of the Global Energy Management Institute at Bauer, for comments on energy in the past year.
Pirrong’s blog, The Streetwise Professor, www.streetwiseprofessor.com, has become a must-read for those in the energy field. Also this year, Pirrong was named to the U.S. Commodities Futures Trading Commission Energy Markets Advisory Committee as the single representative from academia.
Pirrong came to UH in 2003 after teaching at Michigan Business School, the Graduate School of Business at the University of Chicago, the Olin School of Business at Washington University in St. Louis, and Oklahoma State University. Pirrong, who has also worked as a commodities consultant, has undergraduate, graduate and doctoral degrees from the University of Chicago.
Q. Last month, you said that the only way there would be a big drop in gas prices would be if the nation entered into a major recession. Now of course, gas prices have gone down, and there is evidence that we are in or are nearing a recession. The stock market, especially the energy sector, has been incredibly hard-hit. What can we expect to see happen – in regards to energy markets — as the U.S. attempts to dig itself out of what may be a long-term recession?
A. The energy markets — the prices of energy and of energy stocks — are now effectively hostage to the financial crisis, and its effect on the economy. The less effective government policies (both in the U.S. and abroad) are at mitigating the damage from the serious problems plaguing financial institutions and markets, the lower the price of oil will remain, and the longer it will remain there. I wish I was a seer who could forecast when the financial situation will stabilize, but every day more shoes drop, so it would be rash to forecast how deep the problems are and how long they will persist. Suffice it to say, in the near term demand will be the main driver of energy prices, and the credit situation will be the main determinant of demand.
Q. Are there any lingering effects on the energy markets from Hurricane Ike, or has that natural disaster been eclipsed by the current economic crisis?
A. There are lingering effects. Refineries are still not operating at full capacity, though we are most of the way back. Some of the markets most hard hit by the refinery outages — mainly in the Southeast, including Tennessee, Georgia, and western North Carolina — are still not completely back to normal (there were gas shortages in Asheville, NC, when I recently visited), but are gradually returning to normalcy. But, it is evident that Ike has faded from view in light of the chaos in the financial markets.
Q. Is the presidential election likely to have much of an effect on market conditions?
A. Neither party covers themselves in glory when it comes to their energy policies. Whoever is elected, whatever their policy is, it’s going to be a long time before you see an impact on overall world supply.
Q. What kind of impact is the continued development of alternative energy sources likely to have on energy trading?
A. My belief is that the new technology can be important, but the market is the best way to evaluate and encourage the development of these technologies as opposed to government. Some of these great ideas can have unintended consequences. Last year’s energy bill supported the production and consumption of ethanol, but no one foresaw the effect it would have on food pricing. It was an example of incomplete analysis leading to a big — and bad — policy decision. I think that should be something of a cautionary tale.
Q. This summer, as gas prices reached an all-time high, you testified on the role of speculators in the oil markets before the House Agriculture Committee. What was that experience like?
A. It was a quasi-circus-like atmosphere in that the hearing room was pretty crowded. My main takeaway from the experience was that some Congressmen were there to talk and not to listen and some Congressmen were there to listen and not to talk.
Q. You don’t believe speculators should bear the blame for record oil prices. So why do they perennially get targeted when the price at the gas pump is high? And how do they affect free market factors?
A. It’s a populist argument that really hasn’t gone away and is hard to refute. Almost as surely as the sun rises, almost by default, whenever you have a big spike in oil prices, the reaction tends to be, “Let’s round up the usual suspects,” and speculators are always at the top of the list of hardy perennials. Oil output has essentially been a stagnant product since 2005. Until very recently, demand continued to grow in a big way, particularly in China and India, where price controls have kept prices artificially low, which has stimulated consumption. Speculators perform a very valuable function in absorbing some of the price risk. We don’t have an independent objective measure of what the price should be. For better or worse, the market is the best measure because it’s where people put their money where their mouths are, and are punished if they get it wrong. We don’t always like the message the market sends, but interfering with the market mechanism almost always does far more harm than good.
Q. What are some of the things that set Bauer College apart as a business school, particular in relation to energy?
A. We’re energy driven and proud of it, as opposed to schools that don’t want to take an industry-centric approach. It is the place to be; Houston is one of the centers of the universe in terms of energy. Bauer has a tremendous concentration of and is a primary developer of human capital relative to energy. We are incredibly lucky to have instructors with industry experience like Stephen Arbogast, Don Bellman and Art Smith — you don’t just find those guys on the street even in places like Chicago or New York.
About the University of Houston
The University of Houston, Texas’ premier metropolitan research and teaching institution, is home to more than 40 research centers and institutes and sponsors more than 300 partnerships with corporate, civic and governmental entities. UH, the most diverse research university in the country, stands at the forefront of education, research and service with more than 35,000 students.
About the Bauer College of Business
The C.T. Bauer College of Business has been in operation for more than 60 years at the University of Houston main campus. Through its five academic departments, the college offers a full-range of undergraduate, masters and doctoral degrees in business. The Bauer College is fully accredited by the AACSB International – the Association to Advance Collegiate Schools of Business. In August 2000, Houston business leader and philanthropist Charles T. (Ted) Bauer endowed the College of Business with a $40 million gift. In recognition of his generosity, the college was renamed the C.T. Bauer College of Business.