What’s Eating Oil-Producing States?
Crude oil, or “black gold” as it’s commonly called, can have great impact on a country—from boosting employment to strengthening its economy and benefiting real estate.
But the current supply and demand imbalance in the oil industry is causing economic pains for US energy-producing markets. Experts are saying oil states may soon be plunged into recession.
“The US economy as a whole is enjoying sluggish growth. I often joke that the US economy is kind of like the cleanest dirty shirt—it’s not great but it’s better than everybody else,” JLL international director Bruce Rutherford (pictured, a speaker at Bisnow's national Impact of Oil & Gas event Dec. 15) tells us. "Our national economy is benefiting from the fact that oil prices and the resulting refined products that come from oil are very inexpensive." Still, the US is also seeing a disproportionate impact from energy-dominant markets due to low oil prices, Bruce says.
Coming out of the recession, Brent Crude peaked at $115.19/barrel in 2014. But then massive global oil output coupled with a lack of demand triggered a huge price correction that sent crude prices to lows of $26.01 earlier this year, according to Cushman & Wakefield’s latest oil report.
Global suppliers have been working to reach a deal to cut supply. OPEC agreed to cut production for the first time in eight years at the end of September, shocking investors. Members of the organization agreed to limit production to no more than 33 million barrels a day. Since the announcement, an oil rally has pushed prices to the $50 range.
Though consumers are benefiting from low gasoline prices—every one cent drop in gas prices lead to an additional $1B in consumer spending in a year’s time—oil states are facing a recession of sorts due to slower economic growth and less job creation. Cities like Denver, Fort Worth, New Orleans, Houston and Oklahoma City account for most of the country’s oil output, and are being hit hard by the drop in oil prices.
The US accounts for 13.9% of the world’s oil, yet production has been curtailed by low prices, which means there are fewer rigs drilling oil. In some cases, companies are producing less oil in hopes of saving it for times when higher prices can boost profits, Bruce says.
“Oil prices also have direct impact on the demand and/or the desire to get rid of real estate depending on the industry you’re in," he says.
Some markets have proven resilient, Cushman & Wakefield chief economist Kevin Thorpe (pictured above) tells Bisnow. Though Houston’s economy has slowed since oil’s downturn, it’s still creating jobs and has absorbed 337k SF of office space year-to-date.
“It’s not the Houston of the 1980s anymore. Houston in the early 1980s was almost entirely dependent on the energy sector and would have experienced a very severe recession back then. But it’s been surprisingly resilient so far,” Kevin says. “Oil always rebounds. It goes through these corrections and you think these markets are dead forever and then, all of a sudden, they’re booming again."
Learn more about oil's impact on CRE at Bisnow's national Impact of Oil & Gas event Dec. 15 in Houston. Info here.