Houston’s Energy Sector Downturn Part of Cyclical Process,
Institute for Regional Forecasting Director Projects
The energy industry is experiencing turmoil that may or may not be here to stay due to the price of crude oil falling drastically over the last several weeks, according to projections from Institute for Regional Forecasting Director Robert W. “Bill” Gilmer, in his recent economic forecast for the Houston area.
Gilmer outlined his forecast to a record-breaking attendance of nearly 1,000 attendees during the C. T. Bauer College of Business Institute for Regional Forecasting’s fall symposium on Nov. 20. Gilmer’s presentation, titled “Houston’s Growing Pains: The Energy Boom, Labor Shortages, and Rising Interest Rates,” changed focus last-minute as he recognized the imminent effect of crude oil prices slipping to the mid-$70 range, down 30 percent from four months ago. The excess supply of crude oil, largely in part to increased U.S. production from the Gulf of Mexico and shale, paired with a weaker demand has caused the sudden price drop.
“This will be an interesting game to watch as it plays out, as this is a serious reversal of what I anticipated for the forecast just a few weeks ago,” Gilmer said. “It may indicate that Houston’s energy future has become cyclical, transitioning between good times and bad times.”
As a result of the price drop and no indicator of an increase anytime soon, he said this stands to potentially threaten employment growth across industries and possibly create a slow down for multi-family real estate locally.
“Global economic growth has been sluggish as a whole, but the U.S. appears to now be the star of the show going forward,” Gilmer added. “This illustrates a loss of momentum in growth of the global economy and with the current Saudi revenue dilemma; it could push U.S. shale producers to become swing producers, causing Houston to become cyclical right along with it.”
The global loss of economic momentum and a cooling off of the local economy after a long standing energy boom is not indicative of an impending rise in unemployment rates, according to Gilmer. In fact, Houston may add 100,000 jobs in 2014, as the first part of the year took off with oil and gas companies hiring at a considerably high rate. Gilmer says there is the opportunity to cushion any potential losses from lower oil prices thanks to downstream construction and support from the national economy experiencing a one percent gain that could mean the creation of 30,000 jobs locally.
“The energy boom roared on through the first part of 2014, leaving residential and commercial real estate caught somewhere in the middle. Texas homes are still affordable, but less competitive with the rest of the nation,” he said.
Gilmer indicated that single-family lot development is catching up with demand, and 2015 will see more lots come online than are absorbed. Currently, an estimated 10,000 families are seeking houses but they cannot find one or cannot afford the ones offered on the market. Multi-family housing is on a roll, with occupancy rates greater than 90 percent since 2012, but may be less stable than single-family due to 24,000 apartment units under construction with a likely calculated need of only 19,000 units next year. Commercial real estate, namely retail, is expected to gain as consumers save extra money due to the drop in gasoline prices.
“Wealth is building up again in home equity and the stock market. This improved consumer confidence leads to better household spending and we can see retail sales accelerating, up at 2.8 percent annually over the last seven quarters.”
Gilmer said there are two scenarios for Houston as to how the economic story can play out through 2018. If Saudi Arabian-owned oil companies maintain an $80-90 price range for light, sweet crude (WTI) and fracking continues at a high level, it would mean less growth for the area. If fracking is compromised either by low oil prices or by significant cost increases from environmental issues, it could be a bleaker situation.
“If you’re looking at the worst case scenario, fracking may also turn cyclical and start sliding along with the oil prices,” Gilmer said. “The outlook without the continued success of fracking is pretty dreary, but it will not be a serious reversal to Houston’s economy.”
See more photos from the event on WhereAwesomeHappens.com.
By Danielle Ponder