Falling oil prices cloud the forecast for Houston economy

The recent sharp drop in oil prices is clouding the region’s economic forecast, potentially threatening to curtail employment growth across industries and perhaps even slow down the multifamily real estate segment, a prominent local economist said Thursday.

The sudden change in winds caught Bill Gilmer, director of the Institute for Regional Forecasting at the University of Houston, off-guard. Gilmer said during his semi-annual report on the state of the local economy that he had to alter the presentation he’d had ready several weeks ago as the price of crude tumbled into the mid-$70s.

“Things have changed in Houston,” Gilmer told a crowd of more than 900 at the Hyatt Regency downtown. “And they changed fast.”

Gilmer didn’t declare doom and gloom and he doesn’t see the region losing a substantial number of jobs any time soon. But he does see a cooling off of a local economy that had grown white-hot as oil and gas production boomed amid higher prices and improved industry efficiencies.

The impact of the slowdown could vary across sectors of the economy, he said.

The energy boom has been the primary driver in creating 300,000 new jobs in Houston over the last three years and in pushing construction of multifamily, single-family and commercial real estate projects. The Houston economy, which recovered from the recession more quickly than the rest of the nation, has been in “amazing” shape, Gilmer said.

He said he originally planned to focus Thursday’s talk on labor shortages to meet the growth needs.

But the precipitous drop in oil prices forced some recalculations.

The price of oil was $75.58 Thursday, up $1 from Wednesday but down 30 percent from four months ago. An increase in world supply has pushed oil prices to their lowest levels in three years.

Real estate in middle ground

While the dropoff may force hard decisions on oil executives, Gilmer said refineries and petrochemical makers have benefitted from cheaper oil, a key raw material for producing gasoline, diesel and chemicals used in plastics and other goods.

Another beneficiary, he added, is the retail sector that is almost certain to gain as consumers find themselves with extra money in their pockets due to the slide in gasoline prices.

Residential and commercial real estate are caught somewhere in the middle. The single-family industry is likely to remain steady, Gilmer said, as demand still exceeds supply and will continue to drive up prices. For example, he estimated some 10,000 families are seeking houses but either cannot find one or cannot afford the ones on the market.

The multifamily sector may be on shakier ground. Gilmer said there are 24,000 apartment units under construction but there may be a need for only 19,000 units next year. He predicted demand will continue to fall.

Apartment leasing can be an indicator of where the economy is headed, said Nipul Patel, senior vice president and regional manager of Wells Fargo Bank. He said that market is strong today, but he agreed that not all projects on the books might get built.

“In 2015 and 2016 there are going to be a fair bit of deliveries on the multifamily side,” he said.

For the first time in awhile, real estate observers say some apartments are waiving first month rents and offering other specials to attract new tenants.

Patel also said he has not yet seen any negative effect from lower oil prices on Houston’s commercial real estate market.

“The expectation is we probably can’t keep the torrid pace we’ve had with job growth. But even a downtick from that pace is still a good number,” he said. “To me, it still feels OK.”

Gilmer said it remains to been seen how the overall regional economy will react to the first sharp drop in oil prices since the last recession. He said shale producers, who have benefited from advances in hydraulic fracturing and horizontal drilling, are facing their first real test in several years and he predicted the “fracking frenzy” is likely over. “After 10 years of steady success, you sometimes forget there might come a day when you need to tighten the belt,” he said. “I think there was too much exuberance around fracking. Enormous profits were made at $100 a barrel.”

He also said six-figure salaries for truckers and welders may not be sustainable if crude prices remain depressed.

The oil industry has remained cautiously optimistic it can weather the decline in oil prices – as long as they don’t fall dramatically lower – while acknowledging some cuts will be necessary.

“Certainly the economics aren’t as good as they were a month ago, but the overall trend is still positive for our country,” said John England, vice chairman and U.S. oil and gas leader for consulting firm Deloitte. “The fact is we have a lot of oil we can produce economically at current price levels and there are many plays that work at lower price levels than today.”

A report this week from BBVA Compass said that because the Houston and Texas economies have diversified over the last 30 years, they don’t risk the same level of pain suffered during the oil bust of the 1980s.

Gilmer’s conclusions align with two other economists who study the local area.

Parker Harvey, senior regional economist at the Houston-Galveston Area Council, agreed that cycles in the oil industry will have an impact on Houston.

“We will be a town tied to the boom and bust,” Harvey said. “We are right around the pivot point. … But everything ties back to the price of oil.”

Ross Harvison, chairman of the Institute for Supply Management-Houston Business Survey Committee, said he doesn’t foresee catastrophe even if oil prices stay down and production activity drops off.

“It’s not the end times,” he said. “We have a broad economy here in Houston that doesn’t just rely on oil and gas. We just won’t be as advantaged as we had been.”

In his forecast presentation, Gilmer noted that the pace of job growth in the non-energy sector has been fairly flat over the two years. He said Houston will need that segment to strengthen going forward.

He said the improving national company, as well as an increase in construction projects locally in the petrochemical industry, could compensate for some of the cutbacks related to falling oil prices.

‘Hard to predict’

Gilmer presented two scenarios for the coming years. In the best case, the price of oil would settle at $80 to $90 a barrel. Exploration and production spending would slow, although hydraulic fracturing would continue.

The other scenario, featuring a prolonged period of depressed oil prices or significant cost increases related to environmental issues, would find exploration and production spending slowing further and perhaps even declining. Oil-related hiring would slow sharply.

Patel, from Wells Fargo, agreed that a slowdown will come at some point. But he also agreed that it is difficult to say what the implications will be. “The magnitude, I think is harder to predict,” Patel said. “Even a measurable tick down is still a healthy economic environment.”

Houston Chronicle