December 17th, 2014 4:06 PM by AllenBrothers Realtors
Over the past 120 days oil prices have dropped considerably to well under $100/bbl, their lowest prices since 2011. Will this affect Houston’s robust housing market, which is in so many ways tied to the energy industry? Some speculate that the price drop may be a strategic move on the part of Saudi Arabia as it tries to put pressure on other members of OPEC and Russia. Most of these countries require oil to be above $100/bbl to make a profit. True or not, US production of oil is up by half since 2011, and there is evidence of less demand from China and India. The cause is likely a combination of these variables.
What about the Houston market? With a study of charts plotting quarterly local statistics versus oil prices1, it appears that oil prices must be within a certain ideal range between $55 and $93 a barrel in order to facilitate economic growth. Going outside this range would be suppressing either transportation and home-buying budgets on the high end, or job growth and home demand on the low end. At the current pace of prices, it would appear that job growth may slow and place pressure on rising housing prices. The declines that follow may discourage some newer developments by adding a degree of pressure financially. But the overall effect of the fall in oil prices will be beneficial to the Houston housing market.
Less employment in the energy sector will lower pressure on labor in the construction industry, which has been one of the housing market’s primary cost sparks.
Lower gas prices will make development in more remote markets more cost efficient, making cheaper sources of land available and encouraging development of lots at a lower spectrum of the market. A large portion of first time home buyers in Houston are budgeting under $200K, which is not an easy budget to find within the loop.
Lower energy prices may help the overall economy in other markets that are improving, which should help the share of Houston’s economy connected to the national economy.
Houston’s energy economy consists of several forms of energy, which can be referred to as upstream, midstream and downstream. Downstream energy, which is exploration and production, will feel the effects of a lower price in oil. However, the other two energy sectors, midstream (pipelines) and upstream (petrochemical manufacturing) will probably improve as lower prices drive the nationwide market into a higher level of energy consumption requiring more oil/refined products to be moved (midstream) or manufacturing sees decreased costs for feedstock (upstream).
The Houston economy is tightly bound to the energy industry. What is important to keep in mind is that the energy projects that keep the Houston energy economy afloat are typically significant, long-term investments that are not particularly affected by daily or weekly price changes. The long-term worldwide trend for oil consumption is still on a long upward curve. In the short to midterm perspective, the recent drops in energy prices should actually prove beneficial to Houston’s economy, not detrimental.
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