Institute for Regional Forecasting www.bauer.uh.edu/irf
Oil in Freefall! And the Economic Outlook for Houston Robert W. Gilmer Bauer College of Business March 2015
Here We go again! Oil Prices In Freefall Spot Price of WTI in $/barrel 120 110 103.59 96.54 100 93.221 90 84.4 75.79 80 70 59.29 60 50.58 47.69 47.22 50 40 30 20 Jul Aug Sep Oct Nov Dec Jan Feb Mar* *Through 3/13/2015
The Last Four Times We Did This…? Period Rigs Houston Jobs (000) Quarters Count % Decline Quarters Number % Decline -82.4 -17.0 Oil Bust 81Q4 4222 81Q4 1704 86Q3 742 86Q3 1414.8 Asian Financial Crisis -45.9 none 98Q1 998 98Q1 2128.6 99Q2 540 99Q2 2186.9 Enron, Tech Bust, Recession -35.4 -1.3 01Q2 1253 01Q3 2294.4 02Q2 809 03Q3 2265.6 Financial Crisis, Recession -50.9 -4.1 08Q3 1944 08Q4 2608.9 09Q2 953.8 09Q4 2501.7
Texas Ratio Well-Behaved in 2009 Crisis – In Texas!
Let’s Move the Focus to Current Slide in Oil Prices
How Did We Get Here? • Weak demand for crude – Seasonal weakness/refinery turnarounds – Europe and Japan near recession and fear of deflation – Emerging market growth disappoints • Excess supply of crude oil – Sales by Syria and Iraq for revenue to fight insurgencies – The usual OPEC cheating by Venezuela, Iran, Nigeria and other – Increased U.S. production from the Gulf of Mexico and from shale
Global Growth Sluggish in 2014-15 (% GDP Growth) 2012 2013 2014 2015 2016 World 3.4 3.3 3.3 3.5 3.7 U.S. 2.3 2.2 2.4 3.6 3.3 Europe -0.7 -0.5 0.8 1.2 1.4 Japan 1.4 1.6 0.1 0.6 0.8 --- --- --- China 7.7 7.8 7.4 6.8 6.3 India 4.7 5.0 5.8 6.3 6.5 Brazil 1.0 2.5 0.1 0.3 1.5 Source: IMF World Economic Outlook: Update, January 2015
Is the Commodity SuperCycle Over? Aug-01 May-01 Feb-01 Food Oct-00 Ag Raw Materials Metals Jul-00 Crude Oil Apr-00 Jan-00
Growth in the Demand for Oil Comes From Emerging Markets (million b/d) 20 15.9 15 10 Global 8 OECD Non-OECD 5 0 1996-2003 2003-2014 -5 International Energy Agency
On Supply Side? US Shale Reverses 40 Years of Declining Oil Production (million barrels/day) 11 10 9 8 7 6 5 4
US Shale Is a High-Cost Source of Oil: $100/Barrel Was Part of the Magic Reuters Survey
The Saudi Revenue Dilemma • Raise price/lose market share OR cut price/keep market share • The low oil prices work on many levels for the Saudis – Help their friends in the U.S. and – especially -- European economies – Punish their adversaries and enemies: Isis, Iran, Iraq, Venezuela, Russia – Force U.S. shale into the role of the swing producer • Have deep pockets for this venture with $800 billion and more in sovereign fund
E&P Spending Had Already Slowed from the 20 Percent Growth of the Last Decade Real $ billion capital Baker Hughes rig count expenditures 400000 2100 350000 1900 300000 1700 250000 1500 200000 1300 150000 1100 100000 900 50000 700 0 500
Oil-Directed Drilling Has Driven the Rig Count Since 2011 90.0% 80.0% 70.0% 60.0% 50.0% Oil-Directed 40.0% 30.0% Gas-Directed 20.0% 10.0% 0.0% 05-Jan-07 29-Aug-08 23-Apr-10 16-Dec-11 09-Aug-13 Baker Hughes
Domestic Rig Count Already Down Sharply from September Peak Weekly Count of Working Rigs 2000 1900 1800 1700 1600 1500 1400 1300 1200 1100 1000 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15
Another Major Decline in the Oil Fields • How deep? Oil prices easily below $40 per barrel, E&P spending down one-third, more than a 50 percent cut in the rig count • Recovery? Probably need oil at $60 per barrel or more for a significant upswing in drilling • How long? Stability in oil prices by late 2015 or early 2016, recovery in drilling activity in 2016
Fracking Continues, but the Fracking Frenzy is Probably Over • A healthy dose of caution was much needed, a reminder that $100 per barrel is a not fixture in oil • This has been a painful reminder that fracking is a high- cost source of oil, but probably not fatal • Fracking is with us to stay – as long as oil prices near or above $60 per barrel, there will be significant activity • BUT US shale comes out of this as a more cyclical and slowly-growing industry – cutting back with every oil surplus, expanding only with high crude price
Houston Economy Looks Great in the Rear View Mirror
Houston Employment: Off to the Races Again in 2014 6 3.6 4 2 0 -2 -4 -6 Note: December to December changes, except 2014 which is year-to-date, annualized and s.a.
Houston Employment Rides Rising Wave of Oil (3-month percent change at annual rate s) 6.0 4.0 Houston 2.0 0.0 Jan-07 May Sep Jan-08 May Sep Jan-09 May Sep Jan-10 may sept 11-Jan may 12-Jan may sept 13-Jan may sept 14-Jan may sept 2016-jan sep -2.0 -4.0 US -6.0 -8.0 Bureau of Labor Statistics
Purchasing Managers’ Index US and Houston Compared (s.a.) 70.0 65.0 Houston 60.0 55.0 50.0 US 45.0 40.0 Index > 50 means expansion Index < 50 contraction 35.0 30.0
Houston PMI Now Showing Rapid Deterioration 65 60 55 Houston 50 US 45 50 40 35
Houston Unemployment Rate Falls on Strong Job Growth %, s.a. 11.0 10.0 9.0 8.0 7.0 U.S. 6.0 Houston 5.0 4.0 3.0 2.0 Bureau of Labor Statistics
Two Scenarios for Houston’s Near-Term Future
Assume the US Economy Continues to Perform Well • US economy showing signs of putting the effects of the Great Recession behind it • Consumer has deleveraged, state and local government revenues are restored, and single- family housing on the mend • GDP growth solid in recent quarters, just finished the best year for job growth since 1999 • Assume 1.7 percent job growth annually from 2015-2018
Rules of Thumb for Counting Jobs in Houston • Over a period of 4 to 6 quarters, a one percent change in jobs in Houston’s energy cluster means a change of 18,000 total local jobs • Similarly, a one percent growth in U.S. employment brings 33,000 jobs. At 1.7 percent, add 56,100 jobs • How jobs add up annually in Houston: – Job growth of 1.7% PLUS 3% energy base growth = 110,000 new jobs in Houston – 1.7% US job growth MINUS 3% energy base growth = 2,100 jobs in Houston - Minus 6% energy base growth? Recession and the loss of 45,900 jobs
Scenario #1: 20 Percent Cut in Exploration and Production • E&P expenditures fall 10 percent in 2015Q1, then another 10 percent in Q2. They stay flat until 2015Q4, then recover. By 2016Q2. E&P growth then resumes rapid growth at 8 percent per year • U.S. growth remains solid, with 1.7 percent job growth throughout the outlook • As a result, the energy base jobs shrink by 18,700, or 6.2 percent • OTHER THINGS EQUAL this is enough to induce a mild recession in Houston with 50,000 jobs lost in 2015-2016, before growth resumes in early 2017
Scenario #2: 33 Percent Cut in Exploration and Production • Similar to Scenario 1, but with initial 16.5 percent cut, rising to 33 percent. E&P growth resumes at steady 5 percent annually on the same schedule as Scenario #1. • US growth remains solid at 1.7 percent • As a result, the energy base jobs shrink by 23,600 or 7.9 percent. Similar cuts in E&P in 2008-09 resulted in a decline of 30,000 energy jobs • OTHER THINGS EQUAL , the resulting recession in Houston means 78,000 jobs lost in 2015-2016, before growth resumes in early 2017
Figure 2: Houston Job Growth if E&P Falls Without Chemical Expansion (Quarterly % change, annual rates) 6 4 2 0 Scenario 1 Jan-07 May-08 Jan-09 May-10 Jan-11 May-12 Jan-13 May-14 Jan-15 May-16 Jan-17 May-18 Sep-07 Sep-09 Sep-11 Sep-13 Sep-15 Sep-17 Scenario 2 -2 -4 -6 -8
A Construction Boom Built on Low Energy Prices Now More Certain to Continue
Natural gas prices collapsed in late 2011 ($/mcf) 14 12 10 8 6 4 2 0 Jan-1997 Sep-1999 May-2002 Jan-2005 Sep-2007 May-2010 Jan-2013 DOE/EIA
$100 Billion U.S. Construction Boom is Based on Cheap Energy and Exports • New ethylene crackers, more ethylene-related expansion in PE, PVC and other derivative plants • LNG export terminals to sell surplus natural gas into global markets • Gas processing facilities, natural gas liquid export terminals, pipelines and other basic infrastructure • The Gulf Coast is the focus of this expansion
Natural Gas Energy Content Equivalent to $20-$40 per Barrel for Oil 160.00 DOE/EIA and calculations of the author 140.00 120.00 100.00 oil $/b 80.00 nat gas $/b 60.00 40.00 20.00 0.00 Jan-01 Feb-03 Mar-05 Apr-07 May-09 Jun-11 Jul-13
Ethylene Margins (cents per pound) 70 60 50 40 30 20 10 0
Ethylene Projects Proposed or Under Construction In or Near Houston Company Scale Location Completion (thousand m tons/yr) ChevronPhillips 1,500 Baytown 2017 ExxonMobil 1,500 Baytown 2017 Dow 1,500 Freeport 2017 Sasol 1,500 Lake Charles DELAYED Occidental 500 Ingleside 2017 Formosa Plastic 1,200 Point Comfort 2017 LyondellBasell 450 La Porte and 2016 Channelview Total S.A. 900 Port Arthur Proposed
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