Keep calm and drill on: Your survival guide to Houston’s oil slump
The end times aren’t upon us quite yet, and the zombie plague has yet to reach Texas, but the oilpocalypse is in full effect in Houston.
The price of oil has dropped about 50 percent since last summer when energy companies were riding high with oil in excess of $100 a barrel. Now, we’re seeing exploration and production and oilfield services companies drastically slash budgets and cut jobs by the thousands. The Houston area alone is expected to see tens of thousands of job cuts through the first half of 2015, according to energy analysts.
But this is not 1986. Oil prices are already starting to slowly rebound, and most industry experts expect hiring to return and the price of oil to bounce back to the $70s in 2016, if not sooner.
Until then, here is your guide to surviving the oil crisis.
How did we get here?
Dating back to 2011, oil prices have ridden a steady wave at or near $100 a barrel. Courtesy of the U.S. shale boom and growing global energy demands, the Houston energy sector thrived and the city boomed.
All that began to change late last summer. After West Texas Intermediate crude oil pricing peaked at $107 a barrel in June, the price dipped below $90 at the end of September. Then the real plummet began with oil prices dropping about $10 a month and bottoming out — for now — near $45 a barrel in January before rebounding into the low $50s.
Here are five things to know about why the oil boom blew up:
1. The U.S. shale boom has dramatically increased the global oil supply. The U.S. is producing 9.2 million barrels of crude oil a day, which is 4 million barrels more daily than six years ago. Most of the surge has come since early 2012.
2. Global oil demand is still growing, but the pace of growth in 2014 fell short of expectations, leaving the world with a glut of supply. China, Japan, Europe and other places had less oil usage than anticipated. The U.S. energy demand also has flattened out.
3. As the over-supply occurred, many expected OPEC, which is most influenced by Saudi Arabia, to cut production as the price of oil dipped. But Saudi Arabia opted to maintain production and fight to keep its market share, which some have called a game of chicken with U.S. energy producers. OPEC’s actions caused oil prices to further plummet.
4. Even as U.S. production could have created over-supply issues, geopolitical turmoil in Libya, Iraq and other parts of the Middle East was keeping some global oil production offline. Much of that production has since returned. Other geopolitical tensions like the Russia-Ukraine conflict inflated prices somewhat.
5. Some analysts contend energy markets and traders were keeping oil prices artificially a bit higher than they should have been all along and that a so-called market correction was in order. With anxious shareholders, markets also have a tendency to overreact once a freefall is in effect.
Buying v. Renting
Your home in Houston today is worth more than it’s ever been. But now that oil prices have plummeted to six-year lows, are you thinking about selling your home and moving to … oh no, Dallas?
Don’t go over to the dark side yet, said Amy Bernstein, a local Realtor with Bernstein Realty. There’s a lot of economic uncertainty surrounding oil prices — such as job cuts in the energy sector — but the price of your Houston home shouldn’t be one of them, she said.
“I got into this business in 1985 when oil prices really crashed,” Bernstein said. “For me, this isn’t as scary as it was back then. This is a reason to pause, but not a reason for alarm.”
Economists predict home prices will still increase in 2015, although only a bit. This slowdown is actually good for the red-hot housing market.
If you’re looking to buy, 2015 is your year.
During the 1980s, interest rates hovered around 15 percent, which made it very hard for folks to qualify for a home. Amid the Great Recession, interest rates fell to an all-time low, which has become a strong driver in the national housing market.
“Many feel that 2015 is the year to make that purchase, because we all know these interest rates will go up,” Bernstein said.
If you’re looking to sell, 2015 is still a good year to do so.
Amid the doom and gloom of falling oil prices, Houston will still see tens of thousands of new jobs in 2015. These new residents will need a place to live. With homes in such short supply and demand rising, sellers should pocket some serious cash for their homes.
Renting also is a great option, especially for energy professionals who are nervous about their jobs.
Home rentals have always been a good option for expats relocating to Houston because of their flexibility. But for those who aren’t sure about their future employment, renting also has become an enticing option.
Home rentals have always been a good option for expats relocating to Houston because of their flexibility. But for those who aren’t sure about their future employment, renting also has become an enticing option.
Expect a mixed bag for apartments this year
More than half of Houston residents rent. Here’s how to survive the oil slump if you’re in the apartment business.
Here’s how you should weather the oil slump
Four ways to stay afloat after you’ve been fired
The energy industry’s job cuts have created uncertainty about financial security for a lot of employees who could land on the chopping block in the future.
And while the first thought is to bury your money in the backyard, there are some less-extreme options to make sure you’re prepared when and if the pink slip does arrive, said Peter Ip, senior vice president and relationship manager for Houston-based wealth management firm Kanaly Trust.
He outlined four main points to pay attention to in what could be the final days of employment.
1. Manage your health insurance policy. Sometimes it means taking health insurance under the Consolidated Omnibus Budget Reconciliation Act, or COBRA, through your previous employer. Or, if your spouse receives insurance under their plan, it might mean switching insurers.
2. Keep tabs on life insurance. You might have received a corporate-sponsored life insurance policy. However, that could dissolve or become inaccessible to your family if something were to happen. Look at alternatives like an independent policy.
3. Read the fine print on your 401(k). All that money your employer contributed might disappear, depending on the vesting requirements that are set up within the 401(k) program.
4. Diversify. If you’ve been with your company a long time, you’ve likely participated in the company stock discount purchasing program. A big key to stability is diversification, not only away from your company but away from energy too.
Lost your job? Go directly to CEO
So your company swung the axe, and you’re on the wrong side of the latest round of job cuts. What do you do now? There are several possibilities. As a skilled engineer or project manager, your expertise is a valuable tool for other companies around the world. But if that doesn’t sound appealing, the time appears ripe to start your own business, said Tim Jeffcoat, Houston director for the Small Business Administration.
“Each time there is a downturn in the economy, it presents an opportunity to try a new path,” he said. “We can help that entrepreneurial dream happen.” And statistically, he’s right. Last year, lenders issued 25 percent more loans — averaging out to 5.3 a day — compared to 2013, which had about four a day. The average value of those loans also increased.
Although you might be thinking that it’s the wrong time to ask for money in Houston, that’s not the case. Lenders still have capital, and they’ve begun to look at ways to diversify their portfolios away from energy, Jeffcoat said.
So you’ve never been your own boss, and have absolutely no idea how to run a business? Not a problem. There are several programs from SCORE, the Small Business Development Center and the Women’s Business Center backed by the SBA that help unexperienced entrepreneurs with the ins and outs of starting a business. The programs are typically free, and range from issues like business incorporation to finance workshops.
9,000 The number of small business clients the SBA helped last year
$120 million Amount of money Houston small businesses received in financing last year.
Source: SBA
Commercial real estate: Let’s make a deal
Uncertainty in oil prices has slowed down commercial real estate in Houston, as out-of-town investments dry up and speculative projects are put on hold.
If you are in the position to sign a new lease or are a landlord looking to fill space, the instinct may be to play it safe, but, in reality, it can be a great time to make deals, said Bruce Rutherford, an office tenant rep for Chicago-based Jones Lang LaSalle (NYSE: JLL) who works closely with clients in the energy sector.
“If you’re a landlord looking to lease space, my advice would be to be very aggressive in making deals. Very aggressive,” Rutherford said.
This may involve offering more concessions to tenants, experts are saying, but leasing your vacant space soon will provide security as Houston waits out the effects of the slump.
On the other hand, as a tenant whose lease may be expiring or is in the market for new space, Rutherford said this is the ideal time to get a favorable deal.
He clarified that not all landlords will be in the position to give a good deal. If they have low vacancy and a lot of long-term leases with stable tenants, the smart move for them would be to sit tight and wait for a more favorable leasing climate to get the rest of their vacant space filled.
Areas hardest hit
The commercial real estate submarkets that have a high concentration of companies focused on land-based drilling will be hit hardest during the oil slump, as companies consolidate, experts said.
“Anyone in the business of drilling oil on land or servicing those companies in that section, they are very uncertain, or fearful, or in outright panic,” Rutherford said.
The consolidations and contractions of energy companies in that sector will result in a reduced demand for real estate in Houston, he said, particularly in the Energy Corridor, but also in areas like Greenspoint, along the U.S. 290 corridor, and along the Southwest Freeway corridor.
“Downtown is going to suffer a little bit, but not as much,” Rutherford added.
David Hightower, chief development officer at Wolff Cos. and the Energy Corridor Improvement District president, admits that 2015 and 2016 will be slow for the Energy Corridor, but that the submarket was at the cusp of overbuilding and this period serves as a much-needed pause.
“Had we gone another two years at 100,000 jobs, we would have definitely overbuilt,” Hightower said. “This pulled us back from the cliff.”
5% The average vacancy of Houston’s industrial market, which is faring much better than other sectors due to petrochemicals benefitting from low feedstock prices. The several multibillion-dollar ethylene projects underway on the Gulf coast are boosting employment for Houston.
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