How Houston Survived the Great Oil Bust of 2015-16

Bill Gilmer, Director of Institute for Regional Forecasting, C.T. Bauer College of Business

 

Buildings stand on the city skyline during the 2018 CERAWeek by IHS Markit conference in Houston, Texas, U.S., on Tuesday, March 6, 2018. CERAWeek gathers energy industry leaders, experts, government officials and policymakers, leaders from the technology, financial, and industrial communities to provide new insights and critically-important dialogue on energy markets. Photographer: Aaron M. Sprecher/Bloomberg

In November 2014, OPEC announced it would no longer serve as swing producer in world oil markets, triggering what would arguably become the worst downtufurn in the history of American oil.  Based on the rate of decline of the rig count, the number of rigs left working at the worst of it, the lost oil jobs or the fall in capital expenditure, the 2015-16 oil downturn rivaled or exceeded that of the 1980s.

However, the story for Houston’s economy was very different.  Between 1982 and 1986, for example, Houston suffered its worst recession ever, losing 211,000 jobs or about one job in 12.  In contrast, 2015-16 brought the local metro area a loss of only 4,300 jobs overall, or about 0.1% of payroll employment, making it the mildest of any oil-related downturn in local history.

This improved performance was not because Houston was somehow immune to the oil price collapse.  Before 2014, the city was riding a huge boom in oil-related activity, and its abrupt end spelled the loss of 74,200 local oil-related jobs over the following two years.  Figure 1 shows that at the cyclical peak in both 1982 and 2014, Houston had a similar number of oil-related jobs, and as losses mounted, both cycles followed a very similar path.

The Fall in Houston’s Oil Jobs in 2015-2016 Closely Follows an Earlier Path from the 1980’s

Offsetting Losses to Oil

There were probably three key factors that helped Houston’s economy offset the 2015-16 losses in the oil sector: continued growth of the U.S. economy, sustained momentum from a decade of boom-time growth, and a huge petrochemical construction boom driven by low natural gas prices.  This combination added up to just enough to offset a serious setback in oil employment.

  • The most important factor was that the U.S. economy performed well, growing moderately but steadily after 2012. This growth supported Houston’s many companies that are unrelated to oil but which sell into national and global markets.  Local examples would be United Airlines, AIG, Sysco, Men’s Wearhouse and Waste Management.  This contrasts with the 1980s downturn, for example, which began with the long and deep 1982 U.S. recession.
  • Houston had built up tremendous economic momentum from the oil-boom years. Between December 2003 and December 2014, Houston added 696,000 new jobs or enough new jobs to match the total employment of major metro areas like Jacksonville, Salt Lake City or Richmond.  By 2014, Houston was still seriously pressed to finish building the equivalent of a major new metro area in a short period of time, and just because the price of oil fell, the city had not nearly caught up on much-needed roads, schools, hospitals, shopping centers, banks and restaurants. Growth in these secondary sectors continued at boom-time rates in 2015 and slowed only slightly in 2016.
  • Finally, low natural gas prices came to Houston’s rescue. High oil and natural gas prices drive high levels of activity in exploration, drilling and production, and this same activity contracts if prices fall.  However, for Houston’s Ship Channel complex of refineries and petrochemical plants, low energy prices bring good news in the form of reduced feedstock costs and higher profit margins.  In this particular case, a sharp fall in natural gas prices after 2012, to levels below $4 per thousand cubic feet, kicked off a massive $50 billion construction boom.  Centered in East Houston and along the Ship Channel, it was primarily a petrochemical and plastic boom, with some help from LNG exports and refining.  The construction peaked in 2015-16 and has been winding down quickly since then.

How did all this add up for Houston’s economy?  The Federal Reserve Bank of Dallas publishes a business cycle index for Houston that is specifically designed to track the local business cycle.  The index includes four variables: payroll employment, the unemployment rate, real wages, and real retail sales.  (Figure 2)

From 2001-03, for example, the index says that the U.S. tech bust pushed Houston into its mildest recession since 1972, a 2.5% decline measured peak to trough.  In 2008-09, the Great Recession saw Houston’s index fell much further, to 7.9%.  If we had included the 1982-86 period in the chart, it would have shown a local economic collapse of 18.0%.

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