Houston has weathered its fair share of floods and hurricanes in recent years, but are we ready for the economic Big One? It has been more than 35 years since the self-proclaimed Energy Capital of the World saw a real economic disaster like the one barreling toward us. The Saudis are flooding the market with crude and the global coronavirus response is suppressing demand. Our homes may be filled with toilet paper and nonperishable meals, but it’s harder to get ready for an oil bust.
For all the boosterish rhetoric about our diversified economy, the region’s continued economic success relies on international consumption of oil. The petroleum industry drives a third of greater Houston’s GDP and directly employs a quarter-million workers—a number that was already beginning to shrink before things went south this month. Crude has always been a global commodity, and Texas became even more exposed to market swings when the Obama administration removed the ban on crude oil exports.
So when millions of quarantined people in China stop driving their cars, or businesses across the world cancel their international travel, suddenly there are a lot fewer people out there trying to buy Texas crude. The International Energy Agency reports that global oil demand is actually falling. That hasn’t happened since the 2009 fiscal crisis.
If that weren’t bad enough, Saudi Arabia (the world’s second-largest oil producer) has declared an energy war because Russia (the third-largest producer) wouldn’t agree to limit its production to keep global prices at a stable level. So the Saudis are threatening to sell oil below the market price to undercut Russia and make them fall back in line.
Caught in the crossfire is the world’s top producer—the United States. With few exceptions, the producers whose fracking techniques turned the U.S. into an oil behemoth can’t make money when crude sells at only $31 per barrel. Already, Houston companies are plummeting. Apache Corporation and Occidental Petroleum saw share prices fall by more than half on Monday. Layoffs seem imminent. And all this bad news follows an already tenuous outlook for Houston’s economy.
Every good Houstonian knows that booms eventually turn to bust, and local leaders have been preparing for this moment—or at least they’ve been trying. Ed Hirs of the University of Houston has spent years pitching the idea of a quota on oil imports to stabilize oil prices—and oil employment. The policy would function as a sort of coastal storm surge barrier, protecting domestic producers from international oil and gas trouble. Now would be a good time to implement it, but politicians in Washington, D.C., would have to act, so it’s not gonna happen. What are elected officials up to? Democrats remain eerily silent on the oil bust. Donald Trump is actually bragging about low prices. And U.S. senator Ted Cruz is on self-quarantine after possibly being exposed to the new coronavirus.
In January, Greater Houston Partnership held its annual meeting during which chairman Bobby Tudor warned that economic change was coming to the Bayou City whether we wanted it or not.
“The 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. He even raised the specter of how climate change concerns have put Houston’s economic lifeblood “out of favor at the moment, in most every corner of the investing and political world.”
As an example of efforts to diversify the Houston economy, Tudor pointed to Rice University’s Ion project, which will anchor a planned Midtown innovation district. The 270,000-square foot facility—built out of a former Sears store—is supposed to serve as a “nucleus for innovation.” They’ll need to finish the project in a rush. The Ion still looks like an abandoned Sears store—except with holes in the walls. Student activists are fighting its construction, which they see as accelerating gentrification. And an assessment by Rice University’s McNair Center for Entrepreneurship and Economic Growth determined they were building the whole thing in the wrong part of town.
In 2017, the Center for Houston’s Future worked with accounting firm KPMG to help determine how much the city needed to economically diversify in order to maintain an “outperforming economy.” 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 proposed the creation of a three-hundred-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 UT data science campus. Billionaire Tilman Fertitta, chairman of the UH System board of regents, called it “an unnecessary duplication of resources.” State senator John Whitmire, a Houston Democrat and University of Houston alumnus, described it as “$200 million on a dump.” Guess Houston will have to find another multimillion dollar project to stabilize the local economy in the middle of an energy crisis.
Exactly one week before Monday’s market crash, 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 pension reform, budgets remain structurally unbalanced and the city routinely sells assets just to stay afloat.
Of course, this whole bust could turn out to be a short-lived plunge. Oil prices fell by nearly half in 2014 and the Houston economy rebounded in no time—the bust that never came. Frackers learned how to pump oil at cheaper prices and with less manpower. That was good news for investors, but bad news for the people laid off. Compared with the 2014 peak, we’re producing around 40 percent more oil with 20 percent fewer people. Houston may be adding jobs, but they’re not the six-figure positions common in the oil and gas industry. Instead the jobs are in restaurants, hotels, or health care—the kind of careers that don’t necessarily pay well or offer paid sick leave if the coronavirus forces you to hunker down.
Meanwhile, with every passing day, renewables are becoming cheaper than oil or gas. A 2019 report by the International Renewable Energy Agency found that wind and solar energy is often less expensive than any fossil-fuel option—even without subsidies. No surprise, then, that 95 percent of new capacity being added to the Texas grid is solar, wind, or storage. When global demand bounces back, buyers might suddenly discover they’ve lost the appetite for Texas-made oil or natural gas, if only because the alternative costs less money. The natural gas bridge fuel that was supposed to sustain Houston into the clean energy future may end up having a much shorter span than the city had hoped.
Oil and gas aren’t going away overnight. Legacy infrastructure will still rely on petroleum. People will still buy plastic products. But something happens when an industry transitions from growth to flatline. Energy experts know that the real oil and gas pipeline was a money tube from Wall Street to West Texas, and the lenders who finance so much 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 up the Houston economy will start looking elsewhere—and so will workers.
It can be easy to dismiss all this as a hyperbolic scary story, but this is exactly what Houston’s biggest pro-business organization was talking about in January, back when they thought the bust would be years away, if not decades—before the coronavirus and Saudi energy war surrounded Houston like an economic Charybdis and Scylla.
No matter what happens, Houston will still be an oil and gas town. Detroit still manufactures cars. Pittsburgh still has steel mills. Plenty of U.S. cities exist in a place where their best years are behind them, and they’re forced to find a new economic equilibrium—one based on health care, higher education, a port, and a NASA facility. Cleveland, for example. I’m describing Cleveland. But who wants to live in Cleveland?
The last time the world saw a crisis like this was 2008. At the same time Houston was hit by our own disaster—Hurricane Ike. While people around the world responded to a collapsing financial system, Ike and Houston’s belabored recovery barely made headlines. We still haven’t built the coastal storm surge barrier that experts at the time said we needed. As Houston again suffers our own localized disaster—economic, not meteorological—you’ve got to wonder whether anyone will notice if the Energy Capital of the World goes bust.
Hunker down. The Cajun Navy isn’t going to get us out of this one.