Upstream Bust Meets Downstream Boom in Houston: The East Side Earns Some Respect
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The oil price question is dominant for Houston’s economic outlook. Oil, and the timing of a recovery of oil markets, dominates the conversation today. In this presentation, we will see that oil is both helping and hurting right now. The drilling bust is the big negative, damaging the west side of Houston. Meanwhile, a less noticed energy boom is underway on the east side of town – $50 billion in construction of refining, petrochemical and liquefaction plants. Attendees will get a better understanding of: Where we have come from, and where we stand today (5 past and present scenarios) Houston job growth during 2015 (including losses or gains by sector) The impact on Houston’s economy in 2016 if oil remains weak Factors weighing on world oil markets What the future’s market thinks about where WTI oil price is headed How Houston’s downstream boom offsets the upstream bust
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Upstream Bust Meets Downstream Boom in Houston: The East Side Earns Some Respect
- 3. It Is All About Oil in Houston! Price Is Now Down By Over Half $104 $59 $51 $54 $60 43 46 37 32 30 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120 Spot Price of WTI in $/barrel
- 4. We Are Out of Good Options: Five Past and Present Scenarios • Fracking Forever! ‐‐ Summer 2014 • Maybe It Won’t Be So Bad? ‐‐ Early 2015 • V‐Shaped Recovery – Summer 2015 & now off the table • U‐Shaped Recovery – 2016 • Check‐Mark Recovery – Current favorite of big investment houses • Fracking Defeated – Slow and partial recovery of rig count from current levels of drilling
- 5. How Did 2015 Turn Out? Very Slow, But No Recession … So Far December ’14 to December ’15 Jobs Change Who’s Counting? ‐‐ Workforce Commission 23,600 0.8% ‐‐ FR Bank‐Dallas 16,900 0.6% Spring 2014 Forecast 12,900 0.4%
- 6. Job Losses Or Gains By Sector: December 2014 to December 2015 Sector Number of New Jobs 2015 Percent Change Total Payroll 16,900 0.6% Mining ‐17,700 ‐15.8 Construction 11,900 15.6 Manufacturing ‐23,000 ‐9.6 Wholesale Trade ‐2,800 ‐1.6 Transportation and Utilities 400 1.2 Information ‐1,200 ‐3.6 Banking, Finance, and Real Estate 3,200 2.3 Professional and Business Services ‐5,300 ‐1.2 Education and Health 19,500 5.9 Leisure 16,400 6.2 Other Services 200 0.2 Government 8,300 2.4
- 8. How Are You Feeling? • Many sectors of Houston have not felt much pain from this downturn yet. What oil bust? • How can this be? – Maybe they sell into strong national markets: United Airlines, Sysco, AIG, HP, … – Maybe they live in East Houston – Maybe they are living off of past momentum. Houston Added 680,000 jobs from 2004‐2024 – Population stays strong for usually stays strong for several quarters after job growth slows – Most damage has been confined to oil producers, oil services, and manufacturing so far • BUT another slow year in Houston gives time for the slowdown to spread to many sectors that have felt immune so far – healthcare, retail, restaurants, real estate, leisure, and government
- 10. $30 Oil? Where Are We? How Did We Get Here? • The Commodity Super Cycle Comes to an End – Oil, metals, food, agricultural raw materials see price soar after 2004 and stay high for a decade – Primarily driven by a surge in growth by emerging markets, especially China – $100 oil was the market signal to expand capacity, and as the SuperCycle ended we returned to long‐run price near $60 last spring and early summer • Overshoot $60, and wind up below $30 per barrel? – In July, the Iran Nuclear Agreement is signed and promises a return of quick 1.2 million bbl/d to export markets – The August devaluation of the Chinese Yuan distills concerns about China into fear about how bad things might be • Unless China is much worse than we think, this is NOT 1987, when OPEC dumped 10 million barrels of excess capacity on the market – a decade of demand growth
- 12. Global Growth Sluggish in 2015‐16 (% GDP Growth) 2013 2014 2015 2016 2020 World 3.3 3.4 3.1 3.4 4.0 U.S. 1.5 2.4 2.65 2.6 2.0 Euro Area ‐0.3 0.9 1.5 1.7 1.6 Japan 1.6 0.0 0.6 1.0 0.7 ‐‐‐ ‐‐‐ China 7.7 7.3 6.9 6.3 6.3 India 6.9 7.3 7.3 7.5 7.7 Brazil 2.7 0.1 ‐3.8 ‐3.5 0.0
- 13. Days of Chinese Double‐Digit Growth Are Behind Them 0 2 4 6 8 10 12 14 16 Percent change in real GDP
- 17. What the Futures Market Thinks About WTI Oil Price $31 $36 $40 $42 $44 $45 $45 $25 $30 $35 $40 $45 $50 $55 $60 $65 $70 Mar‐16 Aug‐16 Jan‐17 Jun‐17 Nov‐17 Apr‐18 Sep‐18 WTI, Price $/Barrel Futures $60 As of Jan 24, 2015
- 19. Drilling Takes Another Leg Down: The U‐Shaped Recovery Is Here 600 800 1000 1200 1400 1600 1800 2000 2200 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 Weekly Count of Working Rigs Weeks after peak in drilling activity 2008‐2009 2014‐2015
- 22. About Four Non‐Basic Jobs in Houston Supported By Each Base Job 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.8 5.0
- 23. Four Scenarios
- 24. Three Scenarios for Houston’s Economy: Differences Are All About Oil • A V‐shaped recovery that begins in early 2016, with drilling and the rig count expanding as fast as in the recovery of 2009‐2010. This scenario is now pretty much behind us. • A U‐shaped recovery, similar to the V shape, except delayed until mid‐2016. The rig count returns to 1800 rigs, and recovery – once it begins – is at the same rate as the 2008‐09 drilling recovery. Once recovery is complete, energy jobs in Houston grow at 1.8 percent annually, a rate typical of the early phases of the fracking boom. • A check‐mark recovery, with the rig count flat through 2016, and then growing slowly through 2020. The rig count returns to levels near 1800 only by late 2019. Energy jobs return cyclically and with the rig count, and they return to 2014 levels only in 2018Q4 • Saudi’s win! Fracking is damaged seriously by sustained low oil prices, the rig count is only 1300 by the end of 2019, and energy employment does not return to 2014 levels before 2020.
- 25. U.S. Economy Continues to Grow Strongly and Create Jobs • Assume in all scenarios that the U.S. economy has put the Great Recession behind it • Consumer has deleveraged; state and local governments are collecting revenues at a healthy rate and spending; the housing market has returned to close to normal • U.S. job growth is at 1.7 percent or about 200,000 jobs per month throughout the forecast horizon • Current strength of the dollar and struggling global economy make this seem optimistic right now – but current events count for little over a 4‐year horizon
- 26. In All Scenarios, Drilling Decline Brings Mild Recession to Houston ‐8.00% ‐6.00% ‐4.00% ‐2.00% 0.00% 2.00% 4.00% 6.00% 8.00% Payroll Jobs: Quarterly % change at annual rates U‐shaped Check Mark Damaged Asian Financial Crisis Fracking Bust 2001 Recession/Enron U.S. Financial Crisis
- 29. Low Oil Prices Keep Gulf Coast Refining Margins Strong ($/bbl) 0 5 10 15 20 25 30 margin Six‐mo avg
- 31. Natural gas prices collapsed in late 2011 ($/mcf) 0 2 4 6 8 10 12 14 Jan‐1997 Nov‐2000 Sep‐2004 Jul‐2008 May‐2012 DOE/EIA
- 32. $153 Billion U.S. Construction Boom is Based on Cheap Energy and Exports • This $153 total includes many industries and all of the U.S. • 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 • Refiners have joined in with additional expansions Note: The $153 billion figure is based on all shale‐related expansion, estimated by the American Chemistry Council in October, 2015
- 33. Natural Gas Energy Content Equivalent to $20‐$40 per Barrel for Oil 0 20 40 60 80 100 120 140 160 Jan‐01 Mar‐03 May‐05 Jul‐07 Sep‐09 Nov‐11 Jan‐14 oil $/b nat gas $/b DOE/EIA and calculations of the author
- 35. Large Projects Headline Over $50 Billion in East Houston Construction Company Location Project Completion Value ($ mil) Exxon Baytown Ethylene 2017 $5,000 Chevron Freeport Ethylene 2017 $4,000 Dow Baytown Ethylene 2017 $3,500 BASF Freeport Ethylene 2017 $3,000 Freeport LNG Freeport LNG Export 2019 $3,000 Freeport LNG Freeport LNG Export 2020 $3,000
- 38. A Counterweight to Upstream Damage From Low Oil Prices • Jobs adds up quickly given the number and scale of proposed construction projects in 2015‐2017 • These are temporary jobs, disappearing as projects end and capital expenditures wind down • Normally, downstream capital expenditures are small compared to the upstream, move in a narrow range, and create relatively few jobs • The construction projects just described means the downstream can’t be ignored right now. Can this spending substitute for losses upstream?
- 39. Temporary Jobs, Temporary Workers • Does one construction job equal one lost in drilling? In professional and business services? Compensation is good for the skilled, unionized jobs • BUT we are replacing long‐term employment with temporary construction jobs – These jobs will be important in keeping machine shops and industrial base for machinery and fabricated metal busy – But they won’t need high‐end apartments, luxury retail, office space, or other amenities? • Industrial east side booms while the air could be sucked out of the white‐ collar west side. There is plenty of scope for economic disruption, even if overall job numbers stay healthy • Assume multipliers for the construction workers are half of the white‐ collar jobs they replace
- 41. Job Growth in Houston, 2013‐2019 (000 Jobs, Q4/Q4) Scenario Year U‐Shape Check Mark Damage 40/40/20 2013 90.3 90.3 90.3 90.3 2014 103.6 103.6 103.6 103.6 2015 14.0 14.0 14.0 14.0 2016 27.5 17.0 16.8 21.1 2017 100.8 69.0 48.5 77.6 2018 88.9 93.8 66.3 86.3 2019 82.4 78.1 49 74.0
- 42. In Closing … • This is a serious downturn in oil markets, that has run faster and deeper than 2008‐09, and it has serious implications for Houston • The options for a quick and easy way out of this downturn have disappeared, and slow job growth will likely stretch through 2016 • With limited job growth in 2016, many sectors that seemed immune to the slowdown in 2015 will begin to feel it. Health care, leisure, retail, single‐family, and multi‐family will be on this list • That said, it is just one more oil downturn in Houston. It is not 1982 or 1987 in oil markets – and certainly not the Houston economy