Energy Sector Consolidation Weighs on Houston

Lower for longer is a painful refrain for the Houston metro area, as the regional economy adjusts to ongoing low oil prices. After bouncing off the high 30s, West Texas intermediate crude oil has settled near $45 per barrel for most of September. However, the global forces of supply and demand for crude oil may not yet be in a sustainable equilibrium. On the supply side we see consistent evidence of declining U.S. production over the summer, but we also see ongoing strong production from OPEC members as well as the expectation for more output from Iran. On the demand side, developed economies around the world, including the U.S., simply do not need any more oil to continue expanding, due to the deep penetration of energy efficient technology. Suppliers look to developing economies for increased crude oil demand, and many developing economies, including China and Brazil, are cooling down.

Some relief may come to Texas in the form of the end of U.S. crude oil export restrictions. The U.S. House of Representatives’ Energy and Commerce Committee approved a bill to end the ban on crude oil exports that dates back to the Nixon administration. The U.S. Energy Information Agency has recently released a study in support of the ending the ban. Even at current low oil prices, U.S. crude oil exports would help to bolster the liquidity of many stressed energy-related companies.

Nonetheless, we will see still more signs of pain in the energy-sector this fall and winter. Stressed companies will be facing tightening credit availability even as protection from hedges rolls off. Ongoing consolidation in the energy sector will result in more cuts to operations and employment, and those will have further spillover effects on the rest of the state and regional economy. We expect the Houston metro area economy to show small net jobs losses through the middle of next year. We expect to see softer conditions for Houston area real estate markets in the months ahead

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Click here for the complete Houston Regional Economic Update: Houston_2015_Q3.

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