Houston Is Not Prepared for the Oil Bust

Houston has survived its share of floods and hurricanes recently, but are we ready for the economic Big One? As I write, the self-proclaimed energy capital of the world is being hammered by twin crises. The Saudis are flooding the market with crude in what they portray as an attempt to undercut Russia. Meanwhile, the coronavirus is suppressing demand. Houston is poorly prepared for this one-two punch. 

For all the boosterish rhetoric about our diversified economy, greater Houston’s economic success continues to heavily rely on the international consumption of oil. As of earlier this year, the energy industry, dominated by oil and gas, drove a third of the region’s GDP and directly employed a quarter million workers. With crude now selling below $20 per barrel at the time of publication, Houston companies’ revenues and employee counts are plummeting. The Houston Chronicle reported that top fracking firms have cut more than $7 billion from their collective 2020 budgets. Stories about layoffs and furloughs fill the headlines. 

And all this mayhem follows an already tenuous outlook for Houston’s economy. This was supposed to be the year of oil and gas bankruptcies, even before life began to feel like a Roland Emmerich movie. The International Energy Agency reported as early as February that global oil demand was falling, which hasn’t happened since the Great Recession. The United States and Canada saw bankruptcies in the energy sector increase by 50 percent last year, and Dallas law firm Haynes and Boone, which monitors energy bankruptcies, predicted earlier this year that the trend line would continue throughout early 2020. Amid so-so oil prices, expensive overhead, and low cash flow, the only thing keeping many frackers afloat was debt—oceans of debt. 

“It’s all a bit reminiscent of the dot-com bubble of the late 1990s, when internet companies were valued on the number of eyeballs they attracted, not on the profits they were likely to make,” Bethany McLean, an author of books on Enron and the fracking boom, wrote in the New York Times. “As long as investors were willing to believe that profits were coming, it all worked—until it didn’t.”

That piece was published in 2018. 

Every good Houstonian knows that booms eventually turn to busts, and local leaders have been preparing for this moment—or at least they’ve been trying. Ed Hirs, an economics lecturer and energy fellow at the University of Houston, has spent years pitching the idea of a quota on oil imports into the United States, limiting the number of barrels that can be purchased from OPEC. He argues that a quota would stabilize oil prices and protect oil-related employment—the financial equivalent of a coastal storm surge barrier, safeguarding domestic producers from international oil and gas trouble. 

Some Republicans have embraced various policies to limit foreign oil imports. State representative Drew Springer, who represents a rural district in the Panhandle and North Texas, tweeted in March that he favored a tariff, and U.S. senator Kevin Cramer, of North Dakota, has expressed some support for an embargo. But bailing out the oil industry may not be so easy. An early draft of the $2 trillion stimulus package passed in March contained $3 billion for oil and gas companies, but Democrats stripped out the aid, arguing that it amounted to a corporate giveaway. 

In January, at the Greater Houston Partnership’s annual meeting, chairman Bobby Tudor warned that economic change was coming to the Bayou City. “The traditional oil and gas business is not likely to be the same engine for Houston’s growth over the next 25 years that it’s been in the past 25 years,” he told the crowd in a Hilton Americas ballroom. When I spoke with Tudor in March, as West Texas Intermediate hovered around $26 a barrel, he emphasized that diversification is key to the city’s long-term economic survival. 

“One of the things this big downturn does remind us is actually how leveraged we really are to the energy business in Texas,” he said. “We talk a lot about how the economy is so much more diversified than it used to be, and my argument in the speech was, a little bit, ‘Not really.’ At least not for Houston.”

Tudor pointed to Rice University’s Ion project as an example of Houston’s spotty efforts to diversify its economy. The project is meant to anchor a planned Midtown innovation district, and the 270,000-square-foot facility—housed in a former Sears store—is supposed to serve as a “nucleus for innovation” in such fields as data science and digital technologies. Though it’s scheduled to open in 2021, the Ion still looks abandoned. Student activists who see the project as accelerating gentrification have been trying to wring concessions from university administrators. And an assessment by Ed Egan, formerly of Rice’s McNair Center for Entrepreneurship and Economic Growth, determined that the project’s backers were building the facility in the wrong part of town if they wanted to maximize the benefits of bringing start-ups closer together.

In 2017 the Center for Houston’s Future worked with the accounting firm KPMG to determine how much the city needed to diversify in order to maintain an “outperforming economy” in the face of rising threats to the fossil-fuel industry. The report pointed to jobs in the data science industry as a way to sustain the regional economy, even in the worst-case scenario of a permanent oil and gas bust. Around the same time, the University of Texas System proposed the creation of a 332-acre data science campus on land it purchased south of the Astrodome. 

So where is that project today? The University of Houston helped quash the campus. Restaurant billionaire Tilman Fertitta, the chairman of the UH System Board of Regents, called it “an unnecessary duplication of resources.” State senator John Whitmire, a Houston Democrat and UH alumnus, described the proposal as tantamount to spending “$200 million on a dump.” And so the UT System gave up and decided to sell the land. Houston will now presumably have to find another multimillion-dollar project to stabilize its economy in the middle of a pandemic and an energy crisis.

Meanwhile, Houston’s budget is in no shape to absorb an economic shock. In March, city controller Chris Brown released a stress test of Houston’s municipal finances that outlined how the city would fare during a recession. Answer: not well. Despite a decade-long boom and money-saving pension reform, budgets remain unbalanced, and the city routinely sells assets just to stay afloat.

If we’re lucky, the oil bust could turn out to be relatively short-lived and less painful than feared. Oil prices fell by nearly half in 2014, and Houston’s economy rebounded in no time, partly because frackers learned how to pump oil more efficiently with less manpower. Compared with the 2014 employment peak, we’re producing around 40 percent more oil with 20 percent fewer people. (That’s good for energy companies and their investors but not so good for workers. Even if Houston recovers, our economy has already shifted. Most of the new jobs added after 2014 weren’t the six-figure positions common in the industry. Instead, they were in restaurants, hotels, and health care—the kinds of gigs that don’t necessarily offer good salaries or paid sick leave if the coronavirus forces you to stay home.) 

With its prodigious intellectual and industrial talent, Houston could become a leader in the renewable energy industry. The costs of delivering wind and solar energy have fallen, thanks to persistent improvements in technology. A 2019 report by the International Renewable Energy Agency found that wind and solar energy are often less expensive than any fossil-fuel option—even with the lavish subsidies enjoyed by oil, natural gas, and coal. No wonder, then, that 95 percent of the new capacity being added to the Texas electric grid comes from solar, wind, and storage. 

When global demand bounces back, energy buyers may discover they’ve lost their appetite for Texas-made oil and natural gas, if only because the alternative is cheaper. The natural-gas bridge fuel that was supposed to sustain Houston into the clean energy future may end up having a much shorter life span than the city had hoped. But Texas is blessed with plenty of sun and wind and the nation’s only statewide energy grid, and Houston is filled with expertise on the business side of energy. 

Still, oil and gas aren’t going away overnight. Legacy infrastructure and vehicles will still rely on those fuels. Consumers will still buy plastic products and chemical fertilizer. But something happens when an industry transitions from growth to flatline. Energy experts know that the most important oil and gas pipeline was a virtual money tube from Wall Street to West Texas, and the lenders who finance much of the fracking were already tightening the spigot at the end of last year. If things get worse, investors will flee to better opportunities. Capital will dry up. The private equity–backed businesses that juice the Houston economy will start looking elsewhere—and so will workers. 

Whatever else it may become, Houston will still be an oil and gas town for many years. Detroit still manufactures cars. Pittsburgh still makes steel. Plenty of U.S. cities have accepted that their best years are behind them and supplemented their legacy industries by finding a new economic equilibrium—one based to a great degree on, say, health care, higher education, a port, and a NASA facility. Cleveland, for example. I’m describing Cleveland. But who wants to live in Cleveland?

It can be easy to dismiss concerns for Houston’s future as hyperbolic, but they are exactly the worries that the city’s biggest pro-business organization was talking about in January, back when its leaders thought the bust was years, if not decades, off—before the coronavirus and the Saudi-Russian energy war attacked Houston like an economic Scylla and Charybdis. 

The last time the world saw anything as severe as the present calamity was during the Great Recession. Amid that crisis, in 2008, Houston was hit by Hurricane Ike. We still haven’t built the coastal storm surge barrier that experts said we needed after Ike. As Houston suffers another localized disaster—economic, not meteorological—many may wonder if things will be different this time. Will Houston, and Texas, assume that oil prices will quickly bounce back, as they always have? Or will we harness our considerable talent to diversify employment into areas such as wind and solar manufacturing, data analysis, and gene-based medicine? Either way, the Cajun Navy isn’t going to get us out of this one.

Evan Mintz lives in Houston and was a 2017 Pulitzer Prize finalist for editorial writing.