1) The document summarizes the impact of falling oil prices on the Houston regional economy. It discusses how lower oil prices have devastated cash flows in the oil industry and caused layoffs, bankruptcies, and a steep drop in rig counts. 2) It compares the current situation to previous downturns in the 1980s, 1990s, and 2000s. It argues the current situation most resembles the 1990s, with slower job growth across many industries and job losses in oil and gas. 3) It forecasts 50,000 new jobs in Houston in 2015, slower than previous years, but ongoing major construction projects could partially offset losses in oil and gas. Overall, the regional economy will grow more

1. Presented by
Patrick Jankowski
Senior Vice President, Research
Greater Houston Partnership
Regional Outlook

2. https://www.houston.org/economy

4. Follow me on Twitter @pnjankowski
Read my blog: www.houston.org/economy/blog

5. Before I get started . . .

7. 417.3
375.4
402.4
447.9
489.2
517.4
'08 '09 '10 '11 '12 '13
Source: U.S. Bureau of Economic Analysis
Metro Houston GDP – $ Billions
Economic Growth

8. Metro GDP Growth in Perspective
$100.1 Billion $103.9 Billion
Houston GDP Growth, '08 - '13 Austin GDP ('13)
Source: U.S. Bureau of Economic Analysis
Houston Growth vs. Austin Total

9. 179
153
265
298
248
307
392
'08 '09 '10 '11 '12 '13 '14
Source: Greater Houston Partnership New Business Announcements database
New Business Announcements
50+ jobs or 20,000+ Sq Ft or $1+ million Investment
Relocations & Expansions

10. 2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
3.0
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15
Employment(Millions)
Source: Texas WorkforceCommission
Total Nonfarm Payroll, Houston Metro Area, '04 - '15
Employment Growth

11. Now the medicine

12. $107.95
$55.96
Source: U.S. Energy Information Administration
Spot Price, West Texas Intermediate
June 20, 2014 February 13, 2015
Falling Oil Prices

13. $284,528
$156,206
June '14* February '15
Source: Houston Association of Realtors and Partnership calculations
Comparable Drop in Home Prices
If housing suffered the same fate
* Reflects average price of single-family home sold through HAR in June ‘14.

14. $33,600
$15,540
June '14 February '15
Comparable Drop in MSRP
If vehicle prices fell at the same rate
Source: Edmunds.com and author’s calculations

15. Q2/14* Q1/15
Source: C2ER Cost of Living Index and Partnership calculations
$8.75
$3.76
If beverages suffered the same fate
Comparable Drop in Price for Heineken Six Pack

16. Impact of the drop in crude prices

17. Impact of Crude Price Drop on Cash Flows
Texas Average Daily Onshore Crude Production 2.4 million barrels
Decline, WTI Crude, June - January $52/barrel
WTI = West Texas Intermediate, the U.S. benchmark for light sweet crude
Source: Partnership calculations based on data from the Texas Railroad Commission and U.S. Energy
Information Administration
Cash flow has been devastated

18. Impact of Crude Price Drop on Cash Flows
Texas Average Daily Onshore Crude Production 2.4 million barrels
Decline, WTI Crude, June - January $52/barrel
Lost Potential Revenue – Daily $124.8 million
Lost Potential Revenue – Monthly $3.9 billion
Lost Potential Revenue – Annualized $45.5 billion
WTI = West Texas Intermediate, the U.S. benchmark for light sweet crude
Source: Partnership calculations based on data from the Texas Railroad Commission and U.S. Energy
Information Administration
Cash flow has been devastated

19. July 1, 2014 January 30, 2015 % Change
Anadarko Resources $109.33 $81.75 -25.2%
BP 53.00 38.83 -26.7
Apache 100.51 62.57 -37.7
Baker Hughes 74.53 57.99 -22.2
Chevron 130.54 102.53 -21.5
Conoco Phillips 86.11 62.98 -26.9
EOG Resources 116.55 89.03 -23.6
ExxonMobil 101.36 87.42 -13.8
Hess 99.61 67.49 -32.2
Occidental Petroleum 102.80 80.00 -22.2
Schlumberger 117.85 82.39 -30.1
Source: Yahoo Finance
It’s no wonder share prices have fallen

20. How did we get
into this
predicament?

21. Horizontal
drilling and
fracking

22. 8.6
9.0
7.4
6.6
5.8
5.2 5.1 5.1 5.0
5.4 5.5 5.6
6.5
7.5
9.2
9.5.
'80 '85 '90 '95 '00 '05 '06 '07 '08 '09 '10 '11 '12 '13 14* 15**
Source: U.S. Energy Information Administration * as of December ** Projected
U.S. Crude Production, Million Barrels Per Day
Strong Production Growth

23. The energy industry has begun to cut back
1,200
1,300
1,400
1,500
1,600
1,700
1,800
1,900
2,000
Sep Oct Nov Dec Jan Feb Mar
Source: Baker Hughes
U.S. Rotary Rig Count, '14 - '15
621 Rigs
-31.2.%

24. That’s like losing 30 percent of the
industry’s production capacity

25. And some think the rig count may be
halved before crude prices recover

26. • 30 - 40% less spent on exploration
• Price concessions (10 - 50%) from service companies
• Rig count will continue to fall
• One-third fewer wells drilled
• Wells drilled but not completed
• Difficulties servicing debt
• Divestitures and bankruptcies
• Significant layoffs in the oil patch
A nutshell, what the future holds

27. 140
150
160
170
180
190
200
210
220
230
'08 '09 '10 '11' '12 '13 '14 '15
Jobs,000s
Source: Bureau of Labor Statistics
U.S. Employment, Oil & Gas Extraction
Layoffs haven’t appeared in the
employment data yet

28. Because there’s a significant lag in the
employment data

29. But we know the layoffs are coming

30. Layoffs always start in the field

31. Layoffs always start in the field
Soon move to the factory floor

32. Layoffs always start in the field
Soon move to the factory floor
Gradually impact workers in the corporate office

33. Layoffs always start in the field
Soon move to the factory floor
Gradually impact workers in the corporate office
Ultimately affect workers throughout the economy

34. Demand won’t rebound soon

35. 1.40
1.65
1.90
2.15
2.40
2.65
2.90
3.15
10
30
50
70
90
110
130
150
'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16
Jobs(000,000)
$/Barrel
Source: U.S. Bureau of Labor Statistics and U.S. Energy Information Administration
Spot Price WTI $/BBL Nonfarm Payroll Employment
How Houston responded in the past
’80s ’90s ’00s – ’10s

36. 1.40
1.45
1.50
1.55
1.60
1.65
1.70
1.75
10
15
20
25
30
35
40
45
'80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90
Jobs(000,000)
$/Barrel
Source: U.S. Bureau of Labor Statistics and U.S. Energy Information Administration
Spot Price WTI $/BBL Houston MSA Nonfarm Payroll Employment
Houston Employment and Oil Prices: ’80s

37. 1.70
1.80
1.90
2.00
2.10
2.20
2.30
2.40
10
15
20
25
30
35
40
45
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00
Jobs(000,000)
$/Barrel
Source: U.S. Bureau of Labor Statistics and U.S. Energy Information Administration
Spot Price WTI $/BBL Houston MSA Nonfarm Payroll Employment
Employment and Oil Prices: ’90s

38. 2.20
2.31
2.43
2.54
2.66
2.77
2.89
3.00
10
30
50
70
90
110
130
150
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15
Jobs(000,000)
$/Barrel
Source: U.S. Bureau of Labor Statistics and U.S. Energy Information Administration
Spot Price WTI $/BBL Houston MSA Nonfarm Payroll Employment
Employment and Oil Prices: ’00s – ’10s

39. How will the region respond now?
 Like the ’80s
 Like the ’90s
 Like the ’00s – ’10s

40. Not the 80s!

41. 71.7
17.5
'82 - '86 10 - '14
Source: Houston Facts, ‘82 – ’87 and JLL Houston
Metro Office Construction – Million Sq. Ft.
Added to Market
16.2
61.1%
A few things different from the ’80s

42. 71.7
17.5
'82 - '86 '10 - '14
Source: Houston Facts, ‘82 – ’87 and JLL Houston
Metro Office Construction – Million Sq. Ft.
Added to Market Under Construction
16.2
33.761.1%
22.2%
A few things different from the ’80s

43. 187,575
-221,000
'82- '86 '10 - '14
Source: Houston Facts ’82 – ’87 and Texas Workforce Commission
Metro Home Construction and Employment
Housing Units Added Net Job Change
A few things different from the ’80s

44. 187,575 189,575
-221,000
485,000
'82- '86 '10 - '14
Source: Houston Facts ’82 – ’87 and Texas Workforce Commission
Metro Home Construction and Employment
Housing Units Added Net Job Change
A few things different from the ’80s

45. A few things different from the ’80s
Texas Constitution prohibited interstate banking prior to 1987.

46. • Largest in the ’80s
– Texas Commerce Bank
– First City National
– Allied Bank of Texas
– Mbank Houston
– Republic Bank Houston
• Largest Now
– JP Morgan Chase
– Wells Fargo
– Bank of America
– Compass Bank
– Amegy
A few things different from the ’80s

47. A few things different from the ’80s

48. “If you don’t have an oil well,
get one!”
Eddie Chiles, founder,
Western Company of North
America
Hubris
A few things different from the ’80s

49. “Dive 80 and Freeze a
Yankee!”
Bumper sticker frequently
seen in Houston in late 70s
and early 80s
Hubris
A few things different from the ’80s

50. Work Ethic
A few things different from the ’80s

51. Humility
A few things different from the ’80s

52. What will happen to construction?

53. 0
1
2
3
4
5
6
7
8
9
10
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16
$Billions
Source: City of Houston Planning Department
CITY OF HOUSTON BUILDING PERMIT VALUE
12-Month Total
Residential Nonresidential Total
City of Houston Construction

54. • November ’14
– $2.4 billion
• May ’14
– $1.6 billion
• November ’13
– $600 million
• Total = $4.6 billion
County, City, ISD Construction Bond Elections

55. • Tim Relyea, Cushman & Wakefield
– three or four big developments
– hundreds of thousands of SF apiece
– definitely happen regardless of how oil behaves
• Why?
– Cost of capital more important than cost of oil
– Big firms realize most Houston product obsolete
– Three years to get a major project built
Local Office Construction

56. • Tim Relyea, Cushman & Wakefield
– three or four big developments
– hundreds of thousands of SF apiece
– definitely happen regardless of how oil behaves
• Why?
– Cost of capital more important than cost of oil
– Big firms realize most Houston product obsolete
– Three years to get a major project built
Local Office Construction

57. . . . budget adds more than $4 billion a year to build
more roads in Texas . . .
. . . ends diversions of state highway funds . . .
. . . dedicates half of the existing motor vehicle sales tax
to fund roads.
Governor Gregg Abbott’s Address to
the Greater Houston Partnership

58. Company Tons/Year Location Completion
ChevronPhillips 1,500 Baytown 2017
ExxonMobil 1,500 Baytown 2017
Dow 1,500 Freeport 2017
Sasol 1,500 Lake Charles 2018
Occidental 500 Ingleside 2017
Formosa Plastic 1,200 Point Comfort 2017
LyodellBasell 450
La Porte and
Channel View
2016
Major Ethylene Projects Under Construction
on the Gulf Coast
Source: Institute for Regional Forecasting

59. So where is Houston headed?

60. 2015 Employment Outlook
• ’15 Employment Outlook
– 62,900 jobs
– 2.2 percent increase
– 3.0+ million by Dec

61. 2015 Employment Outlook
• ’15 Employment Outlook
– 62,900 jobs
– 2.2 percent increase
– 3.0+ million by Dec
• Probably on the high side but to soon to revise
– 50,000 Jobs
• Jessie Thompson, Federal Reserve Bank of Dallas
– 40,000 – 50,000 jobs
• Bill Gilmer, Institute for Regional Forecasting

62. 2015 Employment Outlook
• ’15 Employment Outlook
– 62,900 jobs
– 2.2 percent increase
– 3.0+ million by Dec
• Probably on the high side but to soon to revise
• More current forecasts
– 50,000 Jobs
• Jessie Thompson, Federal Reserve Bank of Dallas
– 40,000 – 50,000 jobs
• Bill Gilmer, Institute for Regional Forecasting

63. • Slower Job growth
– Construction
– Nondurables Manufacturing
– Wholesale Trade
– Retail Trade
– Utilities
– Real Estate
– Finance
– Professional Services
– Administrative Services
– Educational Services
– Health Care
– Arts, Entertainment, Recreation
– Accommodations and Dining Services
– Personal Services
– Government
• Job losses
– Exploration and Production
– Oil Field Services
– Durables Manufacturing
2015 Employment Outlook

64. -10.4
17.7
43.4
52.9 51.8 52.4
105.2
90.8
17.4
59.0
3.6
-3.2
-11.4
37.5
89.2
105.8
88.8
19.5
-107.4
47.4
81.2
105.7
76.2
120.6
62.9
'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15
Long-term average 47.4
Historic Job Creation (000s)

65. How will Houston respond now?
 Like the ’80s
 Like the ’90s
 Like the ’00s – ’10s

66. Oil Prices and Employment Growth
0
20
40
60
80
100
120
140
160
1.5
1.8
2.0
2.3
2.5
2.8
3.0
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16
WTI
($/bbl)
Jobs
(millions)
Source: U.S. Energy Information Administration and Texas Workforce Commission data
Oil Prices and EmploymentGrowth
Employment Monthly Oil Prices

67. Presented by
Patrick Jankowski
Senior Vice President, Research
Greater Houston Partnership
Regional Outlook