The drop in oil prices over the last six months has been welcome news for many drivers at the gas pump. But in Houston, which is considered the energy capital of the world, the lower prices could also mean setbacks for the economy.
A significant amount of the Greater Houston area's economy is tied to the oil and gas industry—nearly 40 percent of all jobs—with a number of companies located in the Cy-Fair area, such as Oceaneering International, Freudenberg Oil and Gas Technologies and National Oilwell Varco.
"You won't do a sophisticated drilling job anywhere in the world without contacting a Houston company," said Bill Gilmer, director of the Institute for Regional Forecasting in the Bauer College of Business at the University of Houston. "When drilling declines elsewhere around the world, that immediately makes a difference here in Houston in terms of the amount of workers you'll need."
Although local economists do not believe the current scenario will be as severe as the oil bust of the mid-1980s, layoffs in the oil and gas industry began in January and are expected to continue this year.
"I see some people panicking and some people who are nonchalant, and they really should be somewhere in between," said Patrick Jankowski, senior vice president of research for the Greater Houston Partnership. "It will cause some pain for Houston, but it won't be a repeat of the 1980s. We learned our lessons then; growth will slow down, but the economy isn't going to implode."
Drop in prices
Oil prices began dropping in July due to a combination of factors, most notably overproduction of oil and less demand for oil from the developing world, Jankowski said.
"In 2008, we were only producing 5 million barrels a day, and now we are producing 9.2 million a day," he said. "We've almost doubled our production, and normally that would be a good thing but demand in the rest of the world hasn't grown as fast."
The price for one barrel of oil dropped from $104.48 in June 2014 to $48.24 in January. In recent years, the U.S has increased its output of oil significantly due in part to horizontal drilling, or fracking.
"The demand for oil is growing in developing countries, but not fast enough to sop up the new oil we've discovered," Jankowski said. "That's what has been driving [the price of oil] down."
It is impossible to predict the price of oil, Jankowski said, but looking at the trends in drilling and production, once the oil surplus begins to shrink late this year, there should be an improvement in prices. Until then, layoffs in the oil industry are expected to continue in Houston.
"It doesn't matter whether you're in northwest Houston, southwest Houston or central Houston, if you're in the oil and gas business, you will have less money from the oil you're producing," Jankowski said. "With less revenue, it makes it more difficult to meet payroll, service any debt and continue to drill for oil."
Chain reaction
The first jobs cut due to the falling oil prices typically start in the oilfield and move down the line to the manufacturing plant, Jankowski said.
"Eventually you don't need people in the office supervising the office workers," he said. "We've seen layoffs announced by oilfield service companies, but we haven't seen the domino effect running backwards just yet."
Those workers with more specialized job skills, such as reservoir engineers or geologists, will probably not be as at risk as the positions in overhead, support, personnel or accounting, Gilmer said.
"When the [1980s] bust came, we downsized and the baby boomers became the American oil industry," he said. "We'll probably see those jobs projected."
The oil and gas industry is divided into upstream and downstream industries. Upstream companies focus on exploration, field development and production operations, while downstream companies manufacture and refine oil and gas.
"Anyone who is associated with upstream companies will be the most directly impacted," said Adam Perdue, economist with the University of Houston Bauer Institute for Regional Forecasting. "In the U.S. and worldwide, those companies are concentrated in Houston."
On the other end of the spectrum, lower oil prices are good for the petrochemical and refining industries in east Houston.
"I think the main job losses will be white collar jobs, and it will be the west side of Houston that gets hurt from that," Gilmer said. "We won't be building new apartments, office space or high-end retail on the west side to accommodate these temporary workers. We'll probably create 40,000 new jobs in Houston this year, but it won't feel good on the west side, and it will feel like a boom town on the east side of Houston."
Trickle-down effects
Falling oil prices are still expected to have other effects, even for people in Houston who are not employed in the energy sector.
"When drilling declines elsewhere around the world, that immediately makes a difference here in Houston in terms of the amount of workers you'll need."
-Bill Gilmer
"When oil and gas companies do badly, it means their employees won't be spending as much money in other local industries," Perdue said. "You'll see less spending on dry cleaning, less people going to restaurants and less hiring people to build new houses."
Every time a job is lost in the energy business, it in turn cuts about four other jobs out of other sectors of the Houston economy, Gilmer said.
"Even if your job is relatively safe, people will be cautious about spending and that pulls money from the economy," Jankowski said. "People become more conservative with their spending, and that trickles down in the sense that while gas is cheaper, people are spending less money."
Jankowski said he expects to see a slowdown in multifamily and office developments this year, due to the falling prices.
"If the oil company business is contracting, they won't need additional office space," he said. "They won't be hiring workers to fill up new homes and apartments."
However, due to pent-up demand for new homes, robust single-family home construction is expected to continue this year.
"The oil hiccup will create some measure of change, but it's certainly not going to be the driving factor behind Houston's growth," said Bret Nordquist, Realtor with Register Real Estate Advisors. "We expect to see strong sales through 2015."
Additional reporting by Brian Walzel
The drop in oil prices over the last six months has been welcome news for many drivers at the gas pump. But in Houston, which is considered the energy capital of the world, the lower prices could also mean setbacks for the economy.
A significant amount of the Greater Houston area's economy is tied to the oil and gas industry—nearly 40 percent of all jobs—with a number of companies located in the Cy-Fair area, such as Oceaneering International, Freudenberg Oil and Gas Technologies and National Oilwell Varco.
"You won't do a sophisticated drilling job anywhere in the world without contacting a Houston company," said Bill Gilmer, director of the Institute for Regional Forecasting in the Bauer College of Business at the University of Houston. "When drilling declines elsewhere around the world, that immediately makes a difference here in Houston in terms of the amount of workers you'll need."
Although local economists do not believe the current scenario will be as severe as the oil bust of the mid-1980s, layoffs in the oil and gas industry began in January and are expected to continue this year.
"I see some people panicking and some people who are nonchalant, and they really should be somewhere in between," said Patrick Jankowski, senior vice president of research for the Greater Houston Partnership. "It will cause some pain for Houston, but it won't be a repeat of the 1980s. We learned our lessons then; growth will slow down, but the economy isn't going to implode."
