Houston Economic Update from The Greater Houston Partnership

http://www.houston.org/pdf/research/quickview/Economy_at_a_Glance.pdf

The Energy Outlook — After two months of relative stability, crude prices fell significantly in July. West Texas Intermediate (WTI), the U.S. benchmark for light, sweet crude, opened the month at $59.30 on the NYMEX spot market. When the final bell rang and markets closed on July 31, WTI had slipped to $47.20, a decline of $12.10, or 20.4 percent. Crude prices fell for a variety of reasons:

 Growing concern over slowing growth in China: The International Monetary Fund (IMF) forecasts the Chinese economy will grow 6.8 percent in ’15, down from 7.4 percent in ’14 and from double-digit growth as recently as ’10. Slower growth translates into weaker demand for oil. China’s oil consumption is slated to increase only 2.5 percent this year, compared to 3.3 percent last year and 16.8 percent in the boom year of ’04.

 Anxiety over the lifting of Iranian sanctions: Iran will likely boost exports by 500,000 barrels per day once sanctions are lifted later this year or early next. Within a year, exports could climb to 1 million barrels per day. Iran also has 40 million barrels of crude in storage that could quickly flood the market once sanctions are lifted.

 Marginal declines in domestic production: The North American rig count has been cut in half, but the reduction has not impacted crude output. The U.S. Energy Information Administration (EIA) estimates the nation produced 9.6 million barrels of oil per day in June, up from 8.9 million barrels when the rig count peaked in September.

 Stubbornly high inventories: Analysts had expected crude stockpiles to shrink as refineries revved up for the summer driving season. The inventory reductions have been marginal, however. Crude in storage peaked at 483 million barrels in April, slipping to 466 million barrels in June. That’s still well above the 384 million barrels in June last year. As vacations end and refineries begin their fall maintenance programs, inventories are likely to rise again.

A World Awash in Crude — EIA estimates the world currently produces 95.7 million barrels, consumes 93.1 million barrels, and generates a surplus of 2.6 million barrels of oil per day. Ironically, the 2.6 million barrel surplus equates to U.S. production growth over the past two years. Production continues to flow despite low prices. Collectively, Angola, Canada, China, Egypt, Iraq, Libya, Nigeria, Saudi Arabia and the United Kingdom pumped 2 million barrels more in April ’15 than they did in April ’14. For some, it’s a case of holding onto market share; for others, the need to offset in volume what they’ve lost in price.

A similar story is playing out at home, with several firms (e.g., Anadarko, Marathon, Noble Energy) reporting they’ve managed to boost production even though they’ve slashed their exploration budgets. And even though the rig count has plummeted 57 percent from the peak in the Eagle Ford, 56 percent in the Bakken, and 64 percent in the Permian, output in the nation’s three most prolific basins has fallen less than 2 percent. The reason: better technology, more experience drilling and fracking, and a keener understanding of the geology associated with tight oil. Five years ago, initial production from an Eagle Ford well averaged 102 barrels per day. In June this year, initial production averaged 717 barrels per day, according to data from the EIA.

The increased production has not flowed to the bottom line, however. Exxon, the biggest U.S. energy producer, recently reported its lowest quarterly profit since ’09. Chevron posted its worst quarter in 12 years. Earnings from Shell Oil’s upstream business fell 80 percent compared to the same quarter last year. And many independents such as ConocoPhillips, Marathon, and Chesapeake reported outright losses for the quarter.

Prior to the downturn, conventional wisdom held that the typical well in the Eagle Ford would be profitable as long as oil remained above $70 per barrel. Oil hasn’t traded above that level since November ’14. As prices fell, exploration firms demanded price concessions from the service firms, and the break-even point fell as well. Some E&P companies boasted their wells could make a profit at $50 and even $40 per barrel. The importance of that metric has begun to fade, however. The new focus is on corporate overhead, cash flow, debt service, capital discipline, and cost-cutting measures. Investors realize that even though individual wells are profitable, the company overall may be losing money.

A gradual realization seems to be emerging that the price of oil will remain low for the foreseeable future. Baker Hughes, in its second quarter earnings report, said headwinds from tumbling oil prices will persist for the rest of the year. The NYMEX futures market shows oil not trading above $56 a barrel until late in ’17. In its earnings report, Shell Oil stated crude prices may remain depressed for the next five years.

The industry continues to sell assets and reduce headcounts to better function in a lowprice environment. This commodity cycle is following the typical pattern—the first wave of layoffs in the field and on the shop floor, impacting blue-collar and hourly workers; the second wave in the corporate offices, impacting white collar and professional staff. It’s too soon to tell what impact these layoffs will have outside the energy sector. The energy sector—exploration, oil field services, and oil field equipment manufacturing— accounts for 5.0 percent of total nonfarm payroll employment and 14.3 percent of total wages and salaries in the region. Two other sectors closely aligned with energy— fabricated metal products and engineering—account for another 4.5 percent of total em- These sectors are part of Houston’s economic base and as such support a significant number of jobs in the secondary sectors—retail, restaurants, real estate, etc. These jobs are at risk as well. The impact of the downturn on these sectors won’t be apparent until the end of this year or early next year.

On the Brighter Side — Despite the current slump in the energy industry, Houston’s long-term outlook remains bright. The metro area’s real (i.e., net of inflation) gross area product (GAP) is projected to more than double between ’15 and ’40, according to the recently released forecast by Ray Perryman, the Waco-based economist who has studied the U.S., Texas and metro economies since the ’70s.1 Perryman forecasts Houston’s real GAP to grow from $504.1 billion in ’15 to $1.15 trillion in ’40―an average annual growth rate of 3.4 percent. The industries with the fastest annual growth rates from ’15 to ’40 are: services (3.9 percent), manufacturing (3.8 percent), and mining (3.3 percent). These fastest-growing industries are also the largest industry sectors by dollar value. Mining is the largest contributor to Houston’s GAP in ’15 at $138.8 billion (23.1 percent of total GAP) followed by services at $113.4 billion (18.9 percent) and manufacturing at $109.5 billion (18.2 percent). “While the end of the oil surge will affect performance in the near term,” the Perryman report states, “the Houston area’s economy is far more diversified than in decades past and the downturn in oil prices is not likely to derail economic performance for an extended period of time.” The report also notes the importance of growth in non-energy sectors to compensate for the negative impact from lower energy prices.

Over the next quarter-century, the metro area is expected to add 3.4 million residents―an average annual growth rate of 1.7 percent. Wage and salary employment is forecasted to gain 1.5 million jobs―an average annual rate of 1.6 percent. The region is expected to account for one-fourth of Texas’ job growth during this period.

Employment Update — The Houston metro area gained 55,700 jobs in the 12 months ending June ’15, according to the Texas Workforce Commission (TWC). The corresponding 1.9 percent 12-month growth rate is the slowest since November ’11. The employment numbers are somewhat misleading, since all the job gains occurred in the latter half of ’14. Since December, the region has posted a net loss of 5,600 jobs. Employment gains in the service sectors so far this year have not been able to offset losses in the goods producing sectors. Some of the losses date back to the fall of last year. The employment numbers reflect the weakness in the oil patch. The sectors still adding jobs are those which depend heavily on population growth, activity outside the energy sectors, or are benefiting from the momentum built up over the past five years of robust economic expansion.

Still on Top — Houston exported $118.9 billion in goods and commodities in ’14, up $4.0 billion (3.5 percent) from the previous year, according to data recently released by the U.S. International Trade Administration (ITA). Houston led the nation in export sales last year, ahead of New York, Los Angeles, Seattle and Detroit. This marks the third consecutive year Houston has garnered the top spot. Houston’s exports have grown by $77.2 billion, a 185 percent increase, since ’05. No other U.S. metro has experienced comparable growth. Five sectors accounted for the bulk of Houston’s shipments in ’14: petroleum and coal products ($34.8 billion), basic chemicals ($16.6 billion), oil and gas extraction ($12.5 billion), resins and synthetic rubber ($11.2 billion), and heavy industrial machinery ($7.9 billion). Houston supplied 48.7 percent of Texas exports in ’14, down slightly from 51.2 percent in ’13. By comparison, the state’s next largest exporter, Dallas-Fort Worth, accounted for 11.7 percent of Texas exports. Houston’s and San Antonio’s contributions to state exports have grown significantly since ’05 while Austin’s and Dallas’ have shrunk, a reflection of the greater importance of global trade plays in the Houston and San Antonio economies. Readers should be aware that ITA’s export data differ somewhat from the HoustonGalveston Customs District data often cited in local publications. Customs district data reflect cargo that passes through the region’s ports. ITA data are an “origin of movement” (OM) series and reflect the metro from which cargo began its overseas journey. OM includes goods manufactured locally shipped out of Houston, goods manufactured locally that leave the U.S. from a port outside the Houston metro area, and goods produced elsewhere and consolidated in Houston for export.

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