Dec. 20–Houston and Texas could lose thousands of jobs if oil prices remain below $50 a barrel for an extended period, stalling an energy industry recovery that only a few months ago appeared to be gaining momentum, economists said.
The oil sector has found itself in a downward spiral since early October as growing supplies of crude and fears of another global oil glut triggered a 40 percent plunge in prices from a recent high of $76 a barrel down to below $46. Oil settled Thursday at $45.88 a barrel, the lowest since July 2017.
Prices of $60 a barrel are considered healthy for the industry, generating enough profits for companies to spend, grow and hire. At $50 a barrel, growth flattens, energy economists said, and below $50, companies begin to scale back spending and hiring. If prices fall below $40, then another prolonged downturn could take hold.
“It really hurts at $40,” said Bill Gilmer, economist at the University of Houston’sInstitute for Regional Forecasting. “It’s just amazing how fast (oil has) come down.”
If crude stays well below $50 a barrel for more than 18 months, Gilmer said, then the Houston area could lose anywhere from 10,000 to 20,000 energy-related jobs. That still pales in comparison to the 75,000 to 90,000 jobs lost in the region from late 2014 to 2017 when prices plummeted from more than $100 a barrel to a low of $26.
Less than one-third of those jobs have returned since the recovery got underway as oil companies became more efficient and learned to profit by lowering costs and employing fewer workers.
That’s why Karr Ingham, an economist for the trade group Texas Alliance of Energy Producers, said he doesn’t expect widespread layoffs again. If oil stays below $50 a barrel, it will certainly stop job growth in the Texas energy sector, but it won’t mean deep job cuts.
“This is not catastrophic for Houston or the state of Texas” he said. “Oil and gas employment is nowhere near where it was in 2014. There’s no cliff to fall off from.”
But drop in oil prices already appears to be having an effect. The Houston indepdendent oil company ConocoPhillips has said it will keep spending flat in 2019. Producers in West Texas’ Permina Basin, such as Diamondback Energy and Parsley Energy, said this week that they’re cutting the number of drilling rigs they’re running. The long-struggling oilfield services company Weatherford International, which operates largely out of Houston and employs 28,000 people, just received a delisting warning from the New York Stock Exchange as its shares have traded below $1 a share for an extended period.
Weatherford’s stock ended Thursday at 25 cents a share.
Oil prices were rising into early October over expectations that global supplies would tighten because of falling output from countries such as crisis-ridden Venezuela and U.S. sanctions that would keep Iranian oil off global markets. But the White House opted to give waivers from the sanctions to some of the world’s biggest energy consumers, including China and India, leaving much more Iranian oil on the market.
At the same time, the world’s top three producers — the United States, Russia and Saudi Arabia — pumped out record volumes of oil, more than 11 million barrels per day each. In just over a year, U.S. production surged from 10 million to 11.6 million barrels a day, with the Permian Basin in West Texas accounting for about one-third of all U.S. output.
Ingham said that U.S. production is unlikely to fall, meaning, oil prices are unlikely to rebound much next year.
“We just keep churning out oil here at a pretty spectacular rate,” Ingham added. “U.S. production isn’t going in decline unless something more drastic happens.”
In early December, the Organization of the Petroleum Exporting Countries, Russia and other allies agreed to cut production by 1.2 million barrels a day for the first six months of 2019. That deal helped stop oil prices from cratering, but failed to keep them from falling below $50 a barrel. Concerns about an impending global economic slowdown, which would depress demand, have also added downward pressure on prices.
Still, some observers say traders have discounted the impact of the OPEC cuts too much, and they expect oil prices to rise above $50 a barrel relatively early next year. “The markets are overreacting,” said Patrick Jankowski, senior economist with the Greater Houston Partnership.
Big companies will largely do fine with oil at $50 a barrel, he said, although some of the smaller and mid-sized players could struggle if they are carrying high debt loads and the cash flow needed to service that debt dwindles.
Global demand is continuing to grow, Jankowski said, and the global economy is projected to slow only slightly in 2019. Oil prices should stay above $50 a barrel for most of next year, he added.
“With oil over $50, I’m not worried at all,” Jankowski said. “With $40-something oil, I’m a little bit worried. If we see oil drop below $40, then I’m very worried.”
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