Right now there’s so much crude floating around producers are competing to find stash spots.
by Quiscalus Texicanus
Handsome Kevin got a little off track, Took a year off of college
and he never went back. Now he smokes much too much
He’s got a permanent hack, Deals dope out of Denny’s
keeps a table in the back, He always listens to the ground
Always listens to the ground, So I say
I say welcome, welcome to the boomtown, Pick a habit
We got plenty to go around, Welcome, welcome to the boomtown
All that money makes such a succulent sound
Welcome to the boomtown.
– “Boomtown,” David + David, 1986
Unless you work in the awl bidness most Houstonians have been too preoccupied with Coronavirus concerns to spare much thought for the state of Houston’s lifeblood industry.
Sure, prices are way down, and a smaller number know the cause: that the Russians and OPEC have opened their spigots in a game of petrochemical chicken, each trying to force the other into the ditch, each hoping to destroy their own sworn enemies in the process. For the Saudis, that’s Iran, and for the Russians, that’s the USA; more specifically Houston, Midland and to a lesser extent the rest of Texas. (And western Pennsylvania and whichever Dakota is heavily into fracking.)
I’ll leave the analyses of the price war to savvier observers. I’ve lived through two previous oil busts – the mild one a few years ago and the Mother Of Them All in the 1980s – and I’ve never seen one timed so exquisitely, devilishly and awfully hellbent on Houston’s direction.
Our foreign rivals have opened up the spigots before but never have they done so right before the onset of a global pandemic and an ensuing worldwide stock market crash. During previous oil gluts the demand for oil remained more or less constant. That’s not the case now. Also in precursor oil gluts, Wall Street was humming along nicely with plenty of vulture capitalists willing to take long positions on not just oil stocks but also the future of “the Petro Metro,” as then mayor Annise Parker was so weirdly and tragically fond of calling her hometown.
At the end of this current oil crisis what will be left of Houston to scavenge? We are fucked this time. The long anticipated slide of Houston toward Detroit / Pittsburgh / St. Louis status – a once-mighty metropolis rendered largely obsolete by world events – could very well be at hand.
Demand and Economic Diversity
First, let’s analyze what’s different about this oil glut than its predecessors: namely, demand. After that, we’ll get to other talking points, such as the myth of Houston’s economic diversity.
Even as I type this, some fools are jubilant that Russia has announced a 1.1-million barrel per day (b/d) cut to their production. While that certainly does not add to the problem, such a drop is window dressing on the panoramic shit show unfolding to the far horizons, at least according to the analysis of geopolitical strategist Peter Zeihan whose award-winning life’s work in the energy business has earned him a reputation as the savvy investor’s best friend.
Here’s a sample of some of the things Zeihan had to say in his “Coronavirus: The Energy Guide of April 3.”
“As a rule I try to stay out of discussions about energy prices. Energy trading is a hectic business with a lot of stress, plagued by fleets of hotheaded issues that have nothing to do with supply or demand or technology. But that’s not the problem today. The problem today is the world is at the beginning of its sharpest economic downturn since the 1920s while the world’s largest oil exporter has launched a rage-driven price war. The end result is pretty straightforward.
“Oil prices are going through zero. Sometime soon, probably before the end of May, oil prices will be negative. Pretty much everywhere.”
Things like milk, drinking water, shitty beer and a condensation of Mattress Mack’s blather in liquid form will all be considered more valuable than a barrel of crude oil. The barrel itself will have more value than its contents.
Zeihan goes on to look at demand believing that Chinese thirst dropped by three-to-four-million-barrels-per-day (mbpd) during the worst of that nation’s CV outbreak, and that while some Chinese demand has rebounded recently, it has been more than offset by a titanic decline in US gasoline consumption, a number he estimates to be in the range of nine-mbpd.
Zeihan points out that that huge demand drop is just from one sector in one country. Granted, it’s a large sector from an apex economy and comprises the largest portion of what he estimates to be, as of March 31, a 15-mbpd drop in worldwide demand. In Zeihan’s words it’s “The largest decline in demand in both absolute and relative terms in the history of petroleum, and it all occurred in under three months with the bulk of it in less than three weeks.”
Prices are just beginning to fall. Right now there’s so much crude floating around producers are competing to find stash spots. Western Europe and North America are in the early days of quarantine, yet they are a week ahead of other powerhouses such as Indonesia, Brazil, Mexico and even Japan, the latter who concealed the truth about the virus only as long as it took for a postponement of the 2020 Olympics to be imposed upon them.
Factoring all that in, Zeihan’s best guess is that demand will scale back a total of 25-mbpd, an estimate he believes “Eminently reasonable … maybe even a touch conservative.”
Zeihan believes oil’s time in the doldrums won’t be short. He thinks demand will only begin to rally in June at the earliest.
Add to that Zeihan’s forecast of a rising dollar against all foreign currencies, making oil harder to buy outside of the US. As for the Saudis ability to ride out the storm, Zeihan believes that a combination of their enormous cash reserves and the ability of MBS to liquidate both the assets and, if necessary, the lives of some of his wealthier, troublesome prince/cousins will see them through.
Zeihan believes that nothing short of a combined Russian/OPEC cut of at least 15-mbpd would suffice to check the slide of the price of oil. So far, Russia has committed to one-fifth of that. And that’s with the price right now at $26 after a 7.5 percent (likely irrationally exuberant) rally today.
Zeihan again: “In the past, OPEC has often attempted to micromanage oil markets by adding or subtracting bits of crude. But never before have such changes occurred on anything but a multi-month time frame, and never before have such changes shifted the balance by more than a couple million barrels at a time. Coronavirus’ impact is already an order of magnitude more than OPEC’s greatest action, and it all happened in just three weeks.
“This evisceration of demand, the sheer scale of imminent producer collapse is only the beginning. Deepening economic dislocation combined with the greater regionalization of a post-COVID world means oil demand – and global energy markets – will never recover.”
What this means for Houston
I’m not in Zeihan’s league but I do have a brain. What his means for Houston is that the small-to-mid-range shale players are facing an existential threat at best and are dead companies walking at worst. Few will survive, and those that do will either be gobbled up by big companies or simply go tits-up, costing Houston untold thousands of well-paid jobs via consolidation or elimination.
While that all may be true we’ll have to wait and see. But it’s a good thing we diversified. It isn’t like the ‘80s anymore, old man. See how we rumbled right through Enron, 9/11, Katrina, Rita, Ike, the Great Recession, the mid-teens oil downturn and all of Harvey’s floods like Earl Campbell running through the hapless Cleveland Browns? Houston Strong, baby.
Eh, not so much. Things were different then.
Oil held steady or boomed through the Enron scandal and Ike and the Recession. Houston stood as the outlier to the rest of the US economy it had been in the ‘70s and ‘80s. In those days, when the rest of America was up, Houston was down, and when Houston was down, from 1982 into the ‘90s, Reagan’s economy juiced the rest of America into the Gordon Gekko Wet Dream all right-thinking patriots know and adore today.
I will admit it was puzzlement to me how well Houston came through the more recent oil bust. Instead of seeing the plummeting rents, skyrocketing home foreclosures, boarded-up strip malls and apartment complexes, and skyrocketing crime rates of the 1980s, I was seeing only a slight and temporary diminishment in the number of new mixed-used work-live-play luxury multistory lifestyle centers.
Soon enough, CultureMap was abuzz with its prattle about hot chefs and their endless pop-ups and wildly anticipated new craft artisanal food halls and/or dog-friendly breweries and distilleries and other such wonderfully gluttonous foofaraw.
Not content with Gallerias I, II, III and IV, the actual Galleria sprouted an exclusive Jewel Box addition that even Highland Village seemed to merge as an outdoor annex. Rice Village continued its march toward Galleriadom and an even ritzier Galleria popped up – the River Oaks District, linking the Galleria to the Galleria Annex Highland Village.
It made no sense. Where was the demand for all this high-end retail coming from? Who was renting all those $2500 one-bedroom luxury apartments? Why were the Upper Kirby / Montrose / Midtown streets once more crawling with leased late-model cars bearing Florida and Arizona plates, with coiffed drivers steel of eye and beige of soul, heading to and fro one mid-range hotel conference room real estate seminar to another?
This was not how an Oil Bust was supposed to work. And no, it wasn’t because Houston diversified.
Shibboleths of Houston life
That is one of my favorite shibboleths of Houston life. This bust won’t be like the last one because we are now diverse.
Medicine industry people claim the Medical Center is the best and biggest in the world. Debatable but not an outrageous claim.
In 1985, near the bottom of the barrel of the ‘80s bust, medicine’s share of Houston’s total economic earnings was five percent, with oil at ten. (Presumably, these earnings are directly tied to jobs in oil and medicine and don’t include things like food and other ancillary services.)
Eight years later, healthcare had risen to close to seven percent. See? Diverse!
Not so much: oil had risen over that same time frame to 14 percent. Five years ago, oil’s share of the Houston economic pie was even greater and proportionately higher than medicine’s had been in 1985, before we wised up and diversified.
Look at the 25 Fortune 500 companies based in Houston and count the number not energy-related. If you have six fingers on each hand, you will only need half of those on either hand.
As Texas Monthly’s Evan Mintz asks, whatever happened to that big tech incubator that the downtown Sears was supposed to be fast-becoming by now? How did it come to pass, Mintz asks, that we allowed Tilman Fertitta to scupper the University of Texas’s dream of opening a satellite campus in Houston?
Okay, so that’s medicine and tech: where else have we diversified? It’s true that Houston’s port has added container shipping since the ‘80s bust, so that’s something, but the bulk of cargo for the whole complex remains related to oil, natural gas and their byproducts.
In short, it wasn’t the largely mythical diversification of Houston’s still oil-dependent economy that got the Bayou City through the last crash. No, what got us through that was real estate speculation, much of it coming from foreign investors.
Much of that came through a relatively unknown path to permanent residency called the EB-5 visa program. Here’s how it works: say it’s 2015 and you are a bit of a hotshot in Shanghai or Lagos or Guadalajara and you are nervous about investing in the Chinese stock market or pretty much anything in Nigeria or Mexico.
You keep hearing about how your friends and neighbors are becoming American real estate moguls and getting green cards in the process. You look into the program, and here is what you discover: if you could come up with a cool million bucks (or half that in a rural or high-unemployment area), and find a few associates with which to pool your resources, you could come up with enough money to build a luxury apartment building in Houston, so long as its construction created ten jobs.
At the end of that, you had a green card, a path to citizenship, and a source of income in the form of your gleaming new apartment building. (Late last year the Trump administration doubled the entry costs.)
A partial rundown of all the Houston projects through EB-5 visa applicants includes the 28-story Astoria on Post Oak, the Arabella on San Felipe (featuring condos for sale in the $1m to $4m range), downtown’s 20-story Marlowe on Polk Street, renovations on the old downtown post office, and funds toward The Allen nearby the Fed’s Gothamesque outpost on the bayou.
This program did nothing for ordinary Houstonians, save for construction workers, and one can’t help but wonder how many of them are legal residents of the United States.
Houston was seen as a secondary market for these foreign would-be real estate tycoons, lagging behind the first-tier of North American cities like San Francisco, New York, Miami, Vancouver, Seattle and perhaps even Austin, but also as a potentially savvier investment.
After all, Houston remains cheaper than those cities, and when oil launches back into the $100 a barrel stratosphere, as once seemed possible if not likely, they would be in like the proverbial Flynn. Less ventured, more gained.
But oil hasn’t rebounded, not yet, and if you believe doomsayers like Zeihan, it won’t again, not just anytime soon, but never again in any of our lifetimes.
And the pandemic is hitting cash at both the supply and demand sides as well. Things aren’t just tough in Houston, but all over, and in real estate, both residential and commercial. More so on the commercial side.
Even if we find a miracle COVID cure soon, many companies are finding out that expensive office space is a luxury they can definitely do without, and the pandemic is rapidly accelerating the bricks-and-mortar retail apocalypse. That’s the world over; in Houston it figures only to be worse as lucrative local jobs wither along with the price of crude.
It’s got me feeling like Hitler in the bunker, or like a lesser German commander in a more obscure German film. Namely, the 1993 Deutsch film “Stalingrad.”
Towards the end of which we see Generaloberst Walter Hietz briefing his underlings in the doomed 6th Army’s high command:
“Day before yesterday, the Russians broke through the north, near Kletskaya. And now, they’ve broken through in the south too. They will try to close the circle around Kalach sometime today. If they succeed, we’ll be trapped. To sum it up, we’re in deep shit, gentlemen.”
The bright side
But on the bright side, Montrose and the Heights will become cheap and cool again, if also much more dangerous. Perhaps this next bust will spark the rebirth of the Urban Animals, and some new artistic innovation along the lines of the ‘80s and its art cars. Everyone who doesn’t really love Houston, everyone who came here for a paycheck, will leave, because the paychecks won’t be here anymore. So that will leave behind only the broke and the crazy to forge Houston Mark III.
(My advice: sell your house now if you can find a sucker to buy it, and cash in on cheap rents forevermore if you plan to stay here.)
We built this city on slaves and oil, just like the Thomas Jefferson Starship once sang. Cotton and crude were the past, and the future has yet to be invented.