Houston could lose thousands of jobs if oil fails to recover - Houston Chronicle

The price of crude plunged to $41 per barrel Friday, threatening thousands of Houston-area jobs and raising the prospect of the second industry downturn in five years if oil fails to recover within several months.

Oil’s recent collapse, started when a global glut was made worse by the economic effects of the new coronavirus, capped Friday when OPEC and its allies failed to reach a deal with Russia to cut production during meetings in Vienna.

Crude prices plummeted on the news, with the U.S. benchmark closing down 9 percent at $41.28 — a price not seen since April 2016, while the international benchmark, Brent, also settled 9 percent lower at $45.86. Many U.S. companies, especially those in Texas, need crude prices at about $50 to break even, according to the Federal Reserve Bank of Dallas.

If the price of West Texas Intermediate rests at $40 per barrel for two or more quarters, the Houston area could shed about 14,000 oil and gas jobs, said Bill Gilmer, an economist with the University of Houston. Job losses in the industry, which employs more than 265,000 in the region, could rise to 19,000 when including layoffs already caused by the price of crude stuck between $50 and $60 for almost all of last year.

“Oil employment moves very slowly in Houston,” Gilmer said. “For the whole process to work out, it takes four, five or even six quarters.”

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Though there is almost no oil drilling in the Houston area, the region employs the technical experts, office workers and equipment manufacturers. Metal shops, fabricators and equipment manufacturers will be the sector to watch, Gilmer said.

“That’s where jobs will be lost first,” he added.

But $40 per barrel may not be oil’s low point. The U.S. benchmark has fallen 35 percent since its high this year of $63.27 on Jan. 6, a week after the new coronavirus was identified. Prices will continue to fall until production is reduced, said Bob McNally, president of Maryland consulting firm Rapidan Energy Group, in a statement. The depth of the oil bust from 2014 to 2016 saw prices drop to about $26 per barrel before OPEC cut production and restored market balance.

“Without that signal that whistled investors back, prices would’ve kept falling,” McNally said.

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Production needs to be cut by about 2 million barrels per day to stabilize prices, Norwegian energy research firm Rystad Energy estimates. But where those cuts will come from remains up in the air.

The 14 OPEC countries sought to cut production by 1.5 million barrels a day, with nonmember allies such as Russia absorbing 500,000 barrels of that cut. Russia, however, refused, and OPEC officials adjourned their meeting Friday.

In the meantime, U.S. oil production has grown to more than 13 million barrels per day, with the Permian Basin in West Texas and eastern New Mexico pumping out about 4.8 million barrels each day, according to the Energy Department. Irving-based Exxon Mobil’s discovery off the coast of Guyana is expected to add 750,000 barrels per day starting in 2025.

OPEC’s failure to cut production combined with slumping global demand caused by the coronavirus outbreak is a “double whammy” for the industry, said Ann-Louise Hittle, of energy research firm Wood Mackenzie. But the effects could be more pronounced for the U.S. shale industry, which had already squeezed 2020 drilling and completion budgets, she said.

“A sustained bout of low oil prices will further reduce cash flow and investment into the U.S. oil patch, causing further hits to Lower 48 production growth later this year,” Hittle said in a statement. “It takes at least six to nine months for reductions in spending to lead to lower oil production in the U.S. Lower 48.”

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While the industry braces for several weeks of $40 oil, it appears confident to be able to shake short-term effects of the coronavirus. Nearly 35 percent of industry investors expect the coronavirus to peak in the U.S. in May, and a majority believes China’s economy will be back to normal by summer, according to a survey by New York investment banking advisory firm Evercore.

“Ups and downs are part of the oil and natural gas business, and companies have proven themselves nimble and innovative in challenging times,” Texas Oil & Gas Association President Todd Staples said. “We have to remember that not five years ago, oil prices were half what they are today, and free-market principles, science-based regulations and ingenuity helped Texas operators weather the downturn.”

During the 2014 to 2016 downturn, the industry tightened spending, adopted cost-cutting technology to reduce expenses and increased automation. This time around, the industry may seek to lean on artificial intelligence and other digital technologies to improve efficiencies and lower costs at drilling and production sites.

“American oil and gas provides our allies with safe and clean energy, while protecting our national security interests,” American Exploration & Production Council CEO Anne Bradbury said. “Sound regulations and policies that enable U.S. independent producers to continue leading the world in energy development are needed to ensure that our allies do not need to rely on Russian-produced energy and that our country retains the energy independence we sought for decades.”

sergio.chapa@chron.com

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