The Houston economy has experienced impressive growth since 2000 across many measures such as population, jobs, housing, and GDP. However, the steep decline in oil prices since mid-2014 threatens this growth as the oil and gas industry directly makes up about 20% of the Houston economy. A 35% contraction in the oil and gas industry could lead to 52,000 jobs lost in Houston by 2016 and reduce GDP growth, potentially causing a recession in the Houston area over the next 1-2 years as the effects ripple through the local economy. While past downturns did not cause a recession, the current decline represents a unique threat due to Houston's current reliance on the oil and gas industry.
1. HOUSTON:HOUSTON: DO We Have A Problem?DO We Have A Problem?
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Karr InghamKarr Ingham
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Petroleum EconomistPetroleum Economist
Texas Alliance ofTexas Alliance of
Energy ProducersEnergy Producers
2. The Houston EconomyThe Houston Economy
Since 2000Since 2000
Impressive growth by virtually
every measure
•Population
•Labor force
•Employment
•Spending
•Housing
•Gross Metropolitan Product
3. Greater Houston MetroGreater Houston Metro
Area - PopulationArea - Population
1.12 Million added to
population
2000-2014
4. Greater Houston MetroGreater Houston Metro
Area – Labor ForceArea – Labor Force
Expansion of 900,000 in Civilian
Labor Force January 2000 – January
2015
5. Houston Greater MetroHouston Greater Metro
Area – PayrollArea – Payroll
EmploymentEmployment
735,000 jobs added 2000 – 2014
Average growth rate of 2.1% (including
recession)
453,000 jobs added
2010 – 2014
Average job growth rate
of 3.6%
6. Greater Houston MetroGreater Houston Metro
Area – Taxable SpendingArea – Taxable Spending
63% real spending growth 2003 - 2014
8. Greater Houston MetroGreater Houston Metro
Area – Median HomeArea – Median Home
PricePrice
Median home sale price has doubled since
2000
9. Greater Houston Metro AreaGreater Houston Metro Area
– Home Sales Real $– Home Sales Real $
VolumeVolume
Inflation-adjusted dollar volume of
residential real estate sales activity
has more than doubled since 2000
10. Greater Houston MetroGreater Houston Metro
Area – Gross ProductArea – Gross Product
128% increase in Houston GDP since
2002!!!
12. The Texas Petro IndexThe Texas Petro Index
Composite Index based at 100.0 inComposite Index based at 100.0 in
January 1995January 1995
Calculated using a comprehensiveCalculated using a comprehensive
group of Texas E&P indicatorsgroup of Texas E&P indicators
Tracks growth rates and businessTracks growth rates and business
cycles in Texas upstream energy E&Pcycles in Texas upstream energy E&P
economyeconomy
13. Texas Petro IndexTexas Petro Index
ComponentsComponents
Crude oil and natural gas wellhead pricesCrude oil and natural gas wellhead prices
Rig countRig count
Drilling permitsDrilling permits
Well completionsWell completions
Volume & value of Texas crude oil & naturalVolume & value of Texas crude oil & natural
gas productiongas production
Industry E&P employmentIndustry E&P employment
14. The Texas Petro IndexThe Texas Petro Index
Jan 1995 – Feb 2015Jan 1995 – Feb 2015
15. Texas Oil & Gas Payroll EmploymentTexas Oil & Gas Payroll Employment
Monthly January 1995 – February 2015Monthly January 1995 – February 2015
Texas upstream oil & gas employment peaks at
305,000 in December 2014, loss of 7,000 jobs
through February –
AND COUNTING
16. The dominoes are falling…..The dominoes are falling…..
• Crude oil price peaks in June 2014, has
now fallen by 50-60% - value of Texas
production plummets
• Drilling permits peak in October 2014 and
are down by more than 50% from that level
• Weekly rig count peaks in week 3
November 2014 at 906 before falling to 462
last Friday
17. The dominoes are falling…..The dominoes are falling…..
•Upstream industry employment peaks in
December 2014, about 7,000 jobs lost so far in
Texas
18. What can we expect? (Or, whatWhat can we expect? (Or, what
should we be prepared for)?should we be prepared for)?
• The Texas upstream oil & gas economy as
reflected by the Texas Petro Index is likely to
contract by 40% or more
• The statewide rig count will decline by about
2/3 to near 300
• 50,000 or more upstream industry jobs lost,
which may translate into the loss of 200,000
jobs or more in the statewide Texas economy
19. The market occurrence that needs toThe market occurrence that needs to
happen the soonest will take the longest….happen the soonest will take the longest….
• Unlike the 2008 price collapse, which was
demand-driven, the current price collapse is
supply-driven
• New production continues to come online
even today, and production will continue to
increase for at least the first half of 2015
• Probably a year or more until production falls
far enough to begin to effect prices
significantly
20. Five-Year Expansion Cycle is OverFive-Year Expansion Cycle is Over
• October peak marks end of 58-month, 65%
expansion in Texas upstream oil & gas
economy
• 180% increase in Texas crude oil production
• 130,000 jobs added to Texas upstream oil &
gas company payrolls
• Rig count grew from 320 to 906
21. The Statewide Texas Economy WillThe Statewide Texas Economy Will
Be AffectedBe Affected
• The Texas upstream oil & gas industry directly
accounts for about 8.5% of all jobs added to
the post-recession statewide economy
• The industry played a significant role in the
addition of about 40% of all jobs added to the
Texas economy post-recession
• The industry led the Texas economy out of
recession
If it’s true on the way up, it also has to
be true on the way down
22. The Houston Economy Will BeThe Houston Economy Will Be
AffectedAffected
The oil & gas exploration
and production industry
directly comprises one
fifth of the Houston metro
area economy
23. Oil and Gas E&P Industry asOil and Gas E&P Industry as
Direct Percent of Total EconomyDirect Percent of Total Economy
24. Houston Direct UpstreamHouston Direct Upstream
Oil & Gas EmploymentOil & Gas Employment
Industry employment doubled from
2000 - 2014 – but probably peaked
in December 2014
Anticipated loss of 13,000
Industry jobs
25. Employment Effects inEmployment Effects in
HoustonHouston
• 13,000 industry jobs lost may
translate to 52,000 total jobs lost
in Houston over the course of
the oil & gas industry contraction
now underway
• Most of that job loss will occur in
the balance of 2015 and the first
half of 2016
26. Employment Effects inEmployment Effects in
HoustonHouston
• 13,000 jobs is over 12% of all
jobs created in Houston in 2014
• 52,000 jobs is 50% of all jobs
created in 2014
27. Output (GDP) Effects inOutput (GDP) Effects in
HoustonHouston
• Oil & Gas E&P industry comprised an
estimated 37% of GDP growth in
Houston in 2014
• Oil & Gas E&P industry stands to
decline by 35% (nearly $40 billion)
• That $40 billion compares to an
estimated $28 billion added to Houston
metro area GDP in 2014
28. Output (GDP) Effects inOutput (GDP) Effects in
HoustonHouston
• Oil & Gas E&P industry comprised an
estimated 37% of GDP growth in
Houston in 2014
• Oil & Gas E&P industry stands to
decline by 35% (nearly $40 billion)
• That $40 billion compares to an
estimated $28 billion added to Houston
metro area GDP in 2014
29. SO – How Is RecessionSO – How Is Recession
Defined?Defined?
• “During a recession, a significant
decline in economic activity spreads
across the economy and can last from
a few months to more than a year.
Similarly, during an expansion,
economic activity rises substantially,
spreads across the economy, and
usually lasts for several years.”
• US Bureau of Economic Analysis – Business Cycle Dating Committee
30. Recession in Houston in 2015-Recession in Houston in 2015-
2016?2016?
• The jury is still out, in part because this
is a unique event – crude oil price
decline during a time of general
economic expansion in the US
• Occurred in 1998-99, though the
industry circumstances have changed
dramatically since then
33. Recession in Houston in 2015-Recession in Houston in 2015-
2016?2016?
• Is the Houston economy sufficiently
diversified to prevent recession even in
the face of a 60% decline in crude oil
price?
• Industry directly comprises 20% of
Houston economy; total contribution
(direct, indirect, induced) is higher than
that – perhaps as high as 40%
34. Recession in Houston in 2015-Recession in Houston in 2015-
2016?2016?
• A decline of 35% in an industry that
drives 40% of the overall economy
will flatten the economy at best,
and may well trigger at least a mild
recession characterized by flat to
declining spending, total
employment, and output.
35. Recession in Houston in 2015-Recession in Houston in 2015-
2016?2016?
• Almost certain to serve as the
catalyst for what was going to
occur at some point, anyway – a
dramatic slowdown in new
construction in the metro area,
multi-family construction in
particular.
36. Thought For The DayThought For The Day
• If it’s true on the way
up, it has to be true
on the way down.
37. ““Diversification” – All It’sDiversification” – All It’s
Cracked Up To Be?Cracked Up To Be?
• If it could be achieved through
proactive economic development,
would you trade the extraordinary
performance of the Houston
economy over the last decade for
notably slower rates of growth, but
absent cycles caused by
commodity price movements?
38. But let’s not forget…..But let’s not forget…..
• Markets exist to serve consumers, not
producers
• This is how markets are supposed to work
• The function of high prices is to stimulate
production (and limit consumption), which then
pushes prices lower
• The consumer outcome is favorable – lower
prices, and the establishment of abundant and
affordable energy for decades to come
39. HOUSTON:HOUSTON: DO We Have A Problem?DO We Have A Problem?
Marcus & MillichapMarcus & Millichap
Multifamily ForumMultifamily Forum
Houston, Texas April 2, 2015Houston, Texas April 2, 2015
Karr InghamKarr Ingham
InghamEcon, LLCInghamEcon, LLC
Petroleum EconomistPetroleum Economist
Texas Alliance ofTexas Alliance of
Energy ProducersEnergy Producers