Houston Economic Update / Greater Houston Partnership
An Inauspicious Start — ’15 proved to be difficult for the oil and gas industry. Over the course of the year, drilling permits fell 41.6 percent, the North American rig count fell 61.4 percent, and the price of crude fell 29.6 percent. That’s on top of the declines the industry already suffered in ’14.
The new year hasn’t started any better. West Texas Intermediate lost $4.93/bbl the first week of trading, a drop of 13.0 percent. Crude prices will likely fall further before hitting bottom. And the North American fleet lost 34 drilling rigs the first week of January. At 664, the rig count stands at a level not seen since August of ’99.
The causes of the downturn have been widely reported—concerns over slower growth in China, allout production by OPEC, stubbornly resilient U.S. production, and record high crude inventories, both in the U.S. and abroad. Even the ongoing unrest in Libya, Yemen, Iraq and Syria hasn’t impacted the market. Perhaps the greatest indicator of how abnormal the current situation is—in early January, Saudi Arabia broke diplomatic ties with Iran and crude prices fell. Adjusted for inflation, crude is trading at the same level it traded in late ’02.
’16 will be even tougher for the industry. The Texas Railroad Commission issued only 727 drilling permits in December, the fewest for the month in records dating back to ’03. The commission typically issues 1,400 or more in the month. Iranian crude will likely hit the global market this spring, adding to an already glutted market. And the recent drop in prices has further eroded cash flow, impacting the industry’s ability to drill wells, service debt and meet payroll. The long-expected shakeout in the energy industry may finally happen this year.
The impact outside energy has been uneven so far. Office leasing is down, but retail construction is up. City of Houston sales tax collections have slipped, but vehicle sales set a new record. Home closings have fallen. Airport and port traffic continues to grow. And employers continue to add jobs, just enough to offset losses in energy. What follows is a summary of how these sectors are responding to the downturn in oil prices.
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