NMHC’s Emerging Leaders were treated to a fascinating look at the changing energy economy and the potential impact of falling oil prices on the Houston economy during a Speaker Series event there on May 28. 

The evening featured Murry Bowden, CEO of The Hanover Company; Bob Harvey, CEO of the Greater Houston Partnership; and Al Hirschberg, Executive Vice President of Conoco Phillips.  Charter Title sponsored the event.

The main takeaway:  Falling oil prices won’t recreate the devastating energy bust Houston experienced in the 1980s.

Back then, the saying was “Stay alive till 85, find a fix in 86 or its chapter 11 in 87,” said Hirshberg.  “Then we got to 1987 and the economy still wasn’t better, so we added ‘cover your hiney until 1990.’”

Energy Sector Dynamics Have Changed Dramatically

What’s different now? For one, the dynamics of the oil industry.  When asked why the industry didn’t anticipate the recent price drops, Hirshberg explained: “Back in the 1980s, the world market for oil was 60 million barrels a day and the imbalance that caused that era’s crash was 10 million barrels.” 

Today we have a 90 million barrel market, but an imbalance of just one million barrels is enough to throw the market into a tailspin, he said.  Given how hard it is to store oil, that last marginal barrel drives the price, and it can fall pretty quickly.  For the past seven years, OPEC has managed by imbalance by opening and closing its valves.  This year, they stopped doing that. 

The other difference is that in the past, the industry was primarily building large, offshore projects that took years to complete.  When oil prices fell, those projects, backed by deep pocketed balance sheets, would continue because it was too expensive to hit the pause button. Today’s shale production is a lot easier to shut down or ramp up. 

So Has Houston

The other big difference is Houston itself.  In the 1980s, Houston was a suburban city totally dependent on energy.  Now, Houston is considered the energy capital of the world and a truly global city.   One out of five residents was born outside of the U.S., and the city has been successful in attracting foreign investment and employment for non-energy sectors.

China sees Houston as the next city that will take on the attributes of a global city, said Harvey.  The Bank of China is talking about a third office outside of Los Angeles and New York City, and Houston is on its radar.  There’s also now a Houston to Beijing flight.  To the Chinese, Houston is a gateway to Latin America-allows them to do business there without locating all their people there.  They are also attracted to the city’s medical center to give wealthy Chinese access to healthcare. 

That said, while oil is less important to Houston than it once was, it still remains a dominant sector.  Said Hirshberg, “If you pretend Texas was a country, and you put it in OPEC, three or four years ago it would have been the 13th largest producer in volume.  Last year, we’d be number two behind Saudi Arabia.  That means a lot of cash coming through Texas.”

Another important factor-information is also more plentiful now.  In the 1980s, Houston lost 200,000 jobs, but “we refused to believe we had a problem,” said Harvey.  “We built 46,000 apartments. ... It was a toxic combination.” 

This time around, Bowden said the apartment industry started shutting down quickly at the first whiff of trouble.  In other words, there won’t be a boom and bust this time around.

Falling oil prices forced the Greater Houston Partnership to drop its 2015 job growth forecast from 70,000 to 30,000, said Harvey.  But even with the lower oil prices, the city still expects positive job growth.

The Future of Oil

What should the price of oil be?  The $100 to $110 a barrel level was unsustainable said Hirshberg because it created too much of a supply response.  “No scenario goes back to that level,” he predicted. 

The industry needs approximately $80 to $85 a barrel to meet a nominal 1 percent to 2 percent growth rate worldwide.  At those prices, Houston will start to feel normal again.

But it also depends on investor confidence that it will stay at those levels, barring some world event-a coup in Saudi Arabia that takes a lot of production offline, for example. However he didn’t see us getting there any time soon.

Baby Boomers to the Rescue

The other difference this time around is the demographic attracted to the high-rent, high-rise construction so prevalent in Houston and across the country.

“For a long time the buzz was ‘the Millennials are coming,’” said Bowden.  Referencing the company’s Hanover Post Oak project, where the event was held, he noted “this project was geared to younger people.  Yet the average age here is 47, 48, and the average income is between $180,000 and $200,000.”

“We missed in a good way,” he said.  “We have a bias in the industry that smaller units lease faster, but we aren’t acknowledging the size of the pool of older renters who want convenient lifestyles.”