What Falling Oil Prices Mean for the Nation’s Energy Hub

by James McClister

Houston’s booming energy market keeps it uniquely linked to the ups and downs of oil prices.

High investments into oil, gas, mining and logging have effectively turned Houston into the nation’s energy capital. Because of the city’s unique position, Houston is afforded certain benefits, as well as detriments, that other American cities forego; namely, a heighten susceptibility to the sometimes unpredictable tides of international oil prices.

According to Builder, oil prices and housing starts in Houston have long shared a corollary relationship. Since August, oil prices have been steadily falling, reaching $75/bbl in early November, the lowest price since 2011 – price has since risen to $77/bbl. But what does this mean for Houston’s market?

Historically, Builder confirmed, when oil prices fall between $55/bbl and $90/bbl, Houston’s market fairs best with a healthy balance of development and job growth. As it stands, oil prices fall within that sweet spot, but if a pricing forecast from the Energy Information Administration is correct, prices will rise to $91/bbl in 2015 and maintain that balance throughout the year.

As we move into 2015, Builder estimates that job growth will eventually slow, putting pressure on upward prices, but in the mean time, here are a few reasons of why the drop in price is actually good for Houston:

1. Labor redistribution – The city is experience a development boom, largely on account of heavy energy investments, which is corralling a hefty chunk of the area’s labor pool. Declines in the market will reduce employment and likely alleviate the labor shortages currently plaguing Houston’s construction industry – a step towards replenishing inventory.

2. Cheaper fuel – An extra $0.10/gallon adds up driving to and from a worksite. As a result of falling gas prices, expect developers to start looking into more remote markets and building out lower cost land. It should be a huge boon to single-family homes and first-time homebuyers.

3. Diversify – Finally, Houston’s market is so dependent on energy and the business it attracts, that the city has in many ways morphed into a one-dimensional market. Allowing prices to fall and development to slow may open the way for local businesses more dependent on national economic performance to improve and grow.

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