As oil gets cheaper by the day, Houston’s economic prospects grow dimmer.
The US energy capital, according to preliminary employment data that will be revised, has enjoyed annualized employment growth of 2.8 percent so far this year, the Dallas Fed says.
But that “very strong number” may not last if oil prices languish below $45 a barrel for long and the nation’s growing fleet of drilling rigs plateaus, said Jesse Thompson, a business economist at the Houston branch of the Federal Reserve Bank of Dallas.
Oil was down nearly 3 percent in early morning trading Tuesday, falling as low as $42.96 a barrel, after losing more than 1 percent Monday.
If oil stays cheap, “the rate of growth in drilling we’ve seen over the past year might not be sustainable through the year and certainly not into 2018,” Thompson said. “At a certain price point, you’ve eventually saturated the drilling you can afford to do.”
That’s not to say Houston’s economy will sink back into the gloom of 2015 and 2016 – when oil companies and support industries cut some 80,000 jobs – if oil prices hover around $45 a barrel.
Back then, the city barely missed falling into recession and wages stagnated because the energy industry’s high-paying jobs were replaced by lower-paid ones.
But if the nation’s rig count stopped rising each week, the state’s energy would no longer give Houston the extra oomph that has boosted employment among oil companies, service firms, equipment makers, engineering firms and fabricated metal shops, Thompson said.
At the moment, the data showing Houston’s employment growing at a healthy clip line up with other economic indicators showing steady improvements, and historic trends would suggest the region’s oil job market bottomed in February, a year after crude prices hit the lowest point in more than a dozen years at $26 a barrel. That data could be revised, but it’s unlikely the job growth will be entirely erased by the revisions, as it was for the second half of 2016, Thompson said.
Still, he said, the industry recovery has been uneven, and oil companies outside those pumping crude from the prolific Permian Basin are still struggling to make ends meet, and a handful of firms are still filing for bankruptcy. “Although much improved, we still have to make our way through the hangover,” he said.
The recent drop in oil prices raises another troubling question for the Houston’s crop of oil companies: if oil prices sit almost $5 a barrel lower than this time last year, can they still call this a recovery?
“When do you stop calling it a recovery and say this is the price we’re living with now?” Thompson said. “This is the first recovery after a major technological shift. If you believe these productivity numbers, we’re going to need fewer people and fewer rigs. When are we going to know whether this is normal?”
US oil prices settled at $44.20 a barrel on Monday, the lowest settlement in seven months.
This article first appeared on the Houston Chronicle – an Energy Voice content partner. For more click here.
