Houston do-we-have-a-problem

HOUSTON:HOUSTON: DO We Have A Problem? DO We Have A Problem?Marcus & MillichapMarcus & MillichapMultifamily ForumMultifamily ForumHouston, Texas April 2, 2015Houston, Texas April 2, 2015

Karr InghamKarr InghamInghamEcon, LLCInghamEcon, LLC

Petroleum EconomistPetroleum EconomistTexas Alliance of Texas Alliance of Energy ProducersEnergy Producers

The Houston Economy The Houston Economy Since 2000Since 2000

Impressive growth by virtually every measure

•Population•Labor force•Employment•Spending•Housing•Gross Metropolitan Product

Greater Houston Metro Greater Houston Metro Area - PopulationArea - Population

1.12 Mil l ion added to population2000-2014

Greater Houston Metro Greater Houston Metro Area – Labor ForceArea – Labor Force

Expansion of 900,000 in Civi l ian Labor Force January 2000 – January 2015

Houston Greater Metro Houston Greater Metro Area – Payroll Area – Payroll EmploymentEmployment

735,000 jobs added 2000 – 2014Average growth rate of 2.1% (including recession)

453,000 jobs added2010 – 2014Average job growth rate of 3.6%

Greater Houston Metro Greater Houston Metro Area – Taxable SpendingArea – Taxable Spending

63% real spending growth 2003 - 2014

Greater Houston Metro Greater Houston Metro Area – Housing SalesArea – Housing Sales

Greater Houston Metro Greater Houston Metro Area – Median Home Area – Median Home PricePrice

Median home sale price has doubled since 2000

Greater Houston Metro Area Greater Houston Metro Area – Home Sales Real $ – Home Sales Real $ VolumeVolume

Inf lat ion-adjusted dollar volume of residential real estate sales activity has more than doubled since 2000

Greater Houston Metro Greater Houston Metro Area – Gross ProductArea – Gross Product

128% increase in Houston GDP since 2002!!!

Greater Houston Metro Greater Houston Metro Area – GDP Growth RateArea – GDP Growth Rate

The Texas Petro IndexThe Texas Petro Index

Composite Index based at 100.0 in Composite Index based at 100.0 in January 1995January 1995

Calculated using a comprehensive Calculated using a comprehensive group of Texas E&P indicatorsgroup of Texas E&P indicators

Tracks growth rates and business Tracks growth rates and business cycles in Texas upstream energy E&P cycles in Texas upstream energy E&P economyeconomy

Texas Petro Index Texas Petro Index ComponentsComponents

Crude oil and natural gas wellhead pricesCrude oil and natural gas wellhead prices Rig countRig count Drilling permitsDrilling permits Well completionsWell completions Volume & value of Texas crude oil & natural Volume & value of Texas crude oil & natural

gas productiongas production Industry E&P employmentIndustry E&P employment

The Texas Petro IndexThe Texas Petro IndexJan 1995 – Feb 2015Jan 1995 – Feb 2015

Texas Oil & Gas Payroll EmploymentTexas Oil & Gas Payroll EmploymentMonthly January 1995 – February 2015Monthly January 1995 – February 2015

Texas upstream oil & gas employment peaks at 305,000 in December 2014, loss of 7,000 jobs through February –AND COUNTING

The dominoes are falling…..The dominoes are falling…..

• Crude oil price peaks in June 2014, has now fallen by 50-60% - value of Texas production plummets

• Dril l ing permits peak in October 2014 and are down by more than 50% from that level

• Weekly rig count peaks in week 3 November 2014 at 906 before falling to 462 last Friday

The dominoes are falling…..The dominoes are falling…..

•Upstream industry employment peaks in December 2014, about 7,000 jobs lost so far in Texas

What can we expect? (Or, what What can we expect? (Or, what should we be prepared for)?should we be prepared for)?

• The Texas upstream oil & gas economy as reflected by the Texas Petro Index is likely to contract by 40% or more

• The statewide rig count will decline by about 2/3 to near 300

• 50,000 or more upstream industry jobs lost, which may translate into the loss of 200,000 jobs or more in the statewide Texas economy

The market occurrence that needs to The market occurrence that needs to happen the soonest will take the longest….happen the soonest will take the longest….

• Unlike the 2008 price collapse, which was demand-driven, the current price collapse is supply-driven

• New production continues to come online even today, and production will continue to increase for at least the first half of 2015

• Probably a year or more until production falls far enough to begin to effect prices significantly

Five-Year Expansion Cycle is OverFive-Year Expansion Cycle is Over

• October peak marks end of 58-month, 65% expansion in Texas upstream oil & gas economy

• 180% increase in Texas crude oil production • 130,000 jobs added to Texas upstream oil &

gas company payrolls• Rig count grew from 320 to 906

The Statewide Texas Economy Will The Statewide Texas Economy Will Be AffectedBe Affected

• The Texas upstream oil & gas industry directly accounts for about 8.5% of all jobs added to the post-recession statewide economy

• The industry played a significant role in the addition of about 40% of all jobs added to the Texas economy post-recession

• The industry led the Texas economy out of recession If i t ’s true on the way up, it also has to

be true on the way down

The Houston Economy Will Be The Houston Economy Will Be Affected Affected

The oil & gas exploration and production industry directly comprises one fifth of the Houston metro area economy

Oil and Gas E&P Industry as Oil and Gas E&P Industry as Direct Percent of Total EconomyDirect Percent of Total Economy

Houston Direct Upstream Houston Direct Upstream Oil & Gas EmploymentOil & Gas Employment

Industry employment doubled from 2000 - 2014 – but probably peaked in December 2014

Anticipated loss of 13,000Industry jobs

Employment Effects in Employment Effects in HoustonHouston

• 13,000 industry jobs lost may translate to 52,000 total jobs lost in Houston over the course of the oil & gas industry contraction now underway•Most of that job loss will occur in

the balance of 2015 and the first half of 2016

Employment Effects in Employment Effects in HoustonHouston

• 13,000 jobs is over 12% of all jobs created in Houston in 2014

• 52,000 jobs is 50% of all jobs created in 2014

Output (GDP) Effects in Output (GDP) Effects in HoustonHouston

• Oil & Gas E&P industry comprised an estimated 37% of GDP growth in Houston in 2014

• Oil & Gas E&P industry stands to decline by 35% (nearly $40 billion)

• That $40 billion compares to an estimated $28 billion added to Houston metro area GDP in 2014

SO – How Is Recession SO – How Is Recession Defined?Defined?

• “During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year. Similarly, during an expansion, economic activity rises substantially, spreads across the economy, and usually lasts for several years.”

• US Bureau of Economic Analysis – Business Cycle Dating Committee

Recession in Houston in 2015-Recession in Houston in 2015-2016?2016?

• The jury is still out, in part because this is a unique event – crude oil price decline during a time of general economic expansion in the US

• Occurred in 1998-99, though the industry circumstances have changed dramatically since then

Employment Effect 1998-99Employment Effect 1998-99Rate of Year-Over-Year Job GrowthRate of Year-Over-Year Job Growth

Spending Effect 1998-99Spending Effect 1998-99Rate of Year-Over-Year Spending Rate of Year-Over-Year Spending GrowthGrowth


• Is the Houston economy sufficiently diversified to prevent recession even in the face of a 60% decline in crude oil price?

• Industry directly comprises 20% of Houston economy; total contribution (direct, indirect, induced) is higher than that – perhaps as high as 40%


• A decline of 35% in an industry that drives 40% of the overall economy will flatten the economy at best, and may well trigger at least a mild recession characterized by flat to declining spending, total employment, and output.


• Almost certain to serve as the catalyst for what was going to occur at some point, anyway – a dramatic slowdown in new construction in the metro area, multi-family construction in particular.

Thought For The DayThought For The Day

• If it’s true on the way up, it has to be true on the way down.

““Diversification” – All It’s Diversification” – All It’s Cracked Up To Be?Cracked Up To Be?

• If it could be achieved through proactive economic development, would you trade the extraordinary performance of the Houston economy over the last decade for notably slower rates of growth, but absent cycles caused by commodity price movements?

But let’s not forget…..But let’s not forget…..

• Markets exist to serve consumers, not producers

• This is how markets are supposed to work• The function of high prices is to stimulate

production (and limit consumption), which then pushes prices lower

• The consumer outcome is favorable – lower prices, and the establishment of abundant and affordable energy for decades to come

HOUSTON:HOUSTON: DO We Have A Problem? DO We Have A Problem?Marcus & MillichapMarcus & MillichapMultifamily ForumMultifamily ForumHouston, Texas April 2, 2015Houston, Texas April 2, 2015

Karr InghamKarr InghamInghamEcon, LLCInghamEcon, LLC

Petroleum EconomistPetroleum EconomistTexas Alliance of Texas Alliance of Energy ProducersEnergy Producers

Houston do-we-have-a-problem

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