What Does Houston’s Energy Sector Look Like?
Houston’s energy sector encompasses multiple activities. In part one, we discussed the changing energy industry, oil prices, and production. The degree of impact from falling oil prices will vary from one segment of the business to another, and the timing of the impact will vary, too.
The upstream sector of the energy business refers to oil extraction. While the Texas oil fields aren’t actually in Houston, lots of the metro’s energy workers are involved in upstream activities. Direct employment in this part of the industry includes the engineers who determine drilling locations and techniques plus the vast corporate staffing infrastructure that is found at Houston’s energy firms and suppliers. Upstream operations should display the impact of falling oil prices very quickly. When energy companies say they will curtail drilling budgets for 2015, the statement in part means headquarters personnel counts will shrink. Some of the first big staffing reductions are likely to come from drilling suppliers, particularly now that Halliburton, the world’s second-largest oil field services firm, is acquiring Baker Hughes, the third biggest.
Direct employment in this part of the industry includes the engineers who determine drilling locations and techniques plus the vast corporate staffing infrastructure that is found at Houston’s energy firms and suppliers. Upstream operations should display the impact of falling oil prices very quickly. When energy companies say they will curtail drilling budgets for 2015, the statement in part means headquarters personnel counts will shrink. Some of the first big staffing reductions are likely to come from drilling suppliers, particularly now that Halliburton, the world’s second-largest oil field services firm, is acquiring Baker Hughes, the third biggest.
Midstream and Downstream Segments
The midstream segment of the energy business refers to the transport, storage and wholesale marketing of crude oil. Downstream activities center on refining the crude oil into products such as gasoline and petrochemicals, plus the marketing and distribution of the products. Here are a couple of key things to know about the midstream and downstream segments.
- Gulf Coast refineries were built to handle the heavier crude oil that is produced via traditional drilling techniques, rather than the lighter oil produced via fracking. Retooling to process the lighter grade of oil is expensive, and the refineries now able to utilize the lighter oil generally are operating at full capacity. Lighter oil that’s beyond the capacity of Gulf Coast refineries generally is either stored or gets shipped to refining facilities in other parts of the country. Thus, storing and transporting oil that has been produced via fracking is important for Houston’s economy. And, at least over the short term, that segment of the business should hold up better than what’s likely on the way in the upstream segment.
As a side note for the longer term, expanding U.S. oil production beyond the level recorded in 2014 faces challenges in terms of what to do with the light oil that’s generated via fracking and can’t be refined immediately at U.S. facilities. U.S. crude oil exports to other nations have been banned since the 1970s. Swapping light oil for heavier oil with Mexico, which does have further light oil refining capacity, could be an option; but, as with exports, that’s not allowed right now. Changing either regulation will require action from Congress. Yes, you should cringe at that thought.
- Houston’s petrochemical industry is huge, and profitability of petrochemical production tends to improve when the crude oil used as a raw material costs less. Eventual cooling of most downstream activities should occur following a cutback in oil production, but the petrochemical industry may prove to be a notable exception.
What Does All This Mean for Local Job and Wage Growth?
Houston is entering this energy industry downturn from an incredibly strong position. Annual employment growth right now is running at 120,000 jobs, translating to a stunningly big 4.3% annual expansion pace. Annual income growth likewise is quite robust at close to 6%. Both the employment and income growth stats are based on Bureau of Labor Statistics data.
The latest expectations from nationally-respected economic forecasters tend to call for metro Houston to add roughly 100,000 jobs in 2015. However, those expectations very clearly are way too aggressive. (Let’s say the big-name forecasters haven’t yet had time to digest the rapidly-changing environment, rather than just saying that their expertise is questionable.)
The most realistic picture probably will come from Houston’s local economic experts, and the first of those organizations has just released revised expectations. Economists from the University of Houston’s Institute of Regional Forecasting are saying that the 2015 employment growth total should be about 80,000 jobs if oil prices recover a bit and stabilize at a level of roughly $80 to $90 per barrel. Growth closer to 60,000 jobs is anticipated at an oil price below $75 per barrel. At best, then, Houston’s 2015 job growth volume currently looks apt to come in at approximately half the 2014 figure, and that expectation could be generous if we’re not really nearing the bottom of the oil price plunge.
Similarly, near-term wage growth appears unlikely to continue to outpace the U.S. norm by a large margin. Optimistically, wage growth similar to the levels of about 4% seen now in Dallas-Fort Worth and Austin might be achievable. But it wouldn’t be surprising if Houston’s wage growth performance in 2015 cools to a figure under what’s being achieved in its Texas metro counterparts. In part three, we’ll take a closer look at the Houston performance trends we’re anticipating for 2015.