This June, Houston was the most economically attractive place in the country. That was when oil was climbing to its peak of $147 a barrel. Back in those glory days for the offshore oil patch, 81% of oil trading was conducted by speculators who were long oil and short the dollar. But that trade has lost its appeal and now Houston is suffering the effects of a 56% drop in price as the dollar booms 25%.
With the 40% decline in stocks this year and a financial crisis upon us, it looks like New York and Houston -- two cities which are culturally apart -- will both be suffering but for different reasons. Houston is going to suffer due to an expected oil demand slowdown. Despite OPEC's decision to cut its production quotas by 1.5 million barrels a day, crude still dropped $3.39 to close at $64.15 on Friday. Since oil trades in dollars and the world is buying up our Treasury bills due to a belief that the U.S. is a safe haven, the dollar is rising which means it takes fewer of them to buy a barrel of oil.
But despite an apparent slowdown driven by the economic crunch, official forecasts still forecast growth in demand -- albeit at a slower rate. For example, Paris's International Energy Agency (IEA) now predicts global oil demand will average 86.5 million barrels a day this year, up about 440,000 barrels a day from 2007 -- it previously forecast 940,000 barrels a day. This is making Houston's energy sector nervous. Why? The IEA reported that some analysts expect a big proportion of "global drilling rig orders will be canceled."
As New York City suffers from over 200,000 Wall Street layoffs, Houston's energy industry could contract as well. And due to the important role of speculators in driving up the price of oil earlier this year, it is quite possible that many oil traders will be among the New Yorkers who lose their jobs.
Thus, despite cultural differences, Houston and New York are more closely linked economically than some might think.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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Reader Comments (Page 1 of 1)
10-26-2008 @ 1:47PM
Kent said...
A very good summary of oil prices' effects on the two cities summarizes how flighty our economic system can be. It can turn on dime either with you or against you. I do believe that oil prices is not trending yet but instead is undergoing a temporary downward holding pattern (for lack of a better term) because it can turn around again in an instant.
10-26-2008 @ 2:08PM
JCH said...
Lol.
A recession will only slightly ding Houston. Oil companies have been shrinking staffs for 30 straight years.
A recession will damage west Texas.
A depression would hurt Houston.
What you new Yorkers do not know about oil would fill all the dry holes since the beginning of oil.
10-27-2008 @ 2:01AM
Iridium said...
Oil is falling because the Goldman/Vitrol trading scam was outed. Demand wasn't driving the price up and demand isn't driving the price down.
You could make that case if 90% of oil contracts were traded by people in the oil industry. When you had up to 80% of oil contracts traded by speculators you get a controlled market.
Oil is reversing to its actual long term trend. With actual demand models the price per barrel should be around $30. Anything above that is a price being manipulated by market traders. If oil runs back to $100 it will not be because people are using more oil. It will be because hedge traders decided to drive the price up through artificial means just like they did over the past few years.
The shame will be that if oil drops to $40 people will cheer. People will believe that price is a godsend. The truth will be that the price bubble was a ploy to raise the long term price above the natural level. Oil companies will complain about lost profits even though they will be making twice the profit per barrel than they were before the bubble. In effect the market manipulation did its job. We will be buying oil with a 100% inflated price. Real inflation will have spiked throughout the economy dragging real income down by the biggest ammount in the past 30 years.
10-27-2008 @ 4:53AM
andy abraham said...
History always has a way of repeating itself as well what is always fascinating is how the public is always wrong..Oil at 200...or Peak Oil...maybe it will be...but I would bet..Oil could increase due to any conflict in the middle east..We have been chatting about this on Myinvestorsplace.com..
Anything can happen..