Gas prices affect Houston economy

The price of oil continues to climb. Crude oil traded at $112 per barrel last Friday. Many experts predict that prices at the pump will hover around four dollars a gallon for the remainder of the summer.

Around the nation, higher prices are squeezing the pocketbooks of many households. Because gas is a relatively inelastic good, consumers are finding other ways to consume less and cut costs.

In an interview with NPR, Peter Morici, an economist at the University of Maryland, described the effect higher prices have on the economy. “Whenever we pay more for gas, dollars leave the country to pay for imported oil. That’s money that could be spent on US products and, in turn, it slows demand, growth and jobs creation,” Morici said.

Higher gas prices are without a doubt having a negative impact on the nation’s economy. And soaring prices are certainly taking a toll on UH commuters. But how is the greater Houston economy responding to higher oil prices?

With so much of our economy tied to the oil and gas industry, rising commodity prices have actually had a positive impact on the Houston business community, thus far.

Houston is home to more than 43 of the 144 publicly traded oil and gas exploration and production firms. The energy industry accounts for an estimated 48 percent of all jobs in Houston, according to an article published in the Chicago Tribune by Howard Witt. As a result, when crude prices increase, many people in the Houston area benefit either directly or indirectly.

When the industry’s profits are up, the benefits tend to filter down to other businesses as well. Oil companies are scrambling to find new fields as prices rise, and demand for oil and gas related goods and services is increasing. Houston-based Schlumberger provides equipment and services to the petroleum industry and says it expects to see a substantial increase in production activity within the next six months.

Furthermore, Saudi Arabia’s decision to reduce its production of crude while raising the price of oil will prompt US based companies to increase production. Also, demand for production-related goods and services will increase, benefiting the local economy to some extent.

Companies are buying more supplies while hiring more employees, and making more deals. In an interview with the Houston Chronicle, Robin Fredrickson, a mergers and acquisitions lawyer at Vinson & Elkins, said that stable prices encourage deal making. “Buyers and sellers want to know what is happening in the market before they commit to a sale,” Fredrickson said.

At this point, buyers and sellers know the price of oil is only expected to rise.

Industry analyst Bill Herbert said in an interview with the Houston Chronicle that the “implications for the oil industry are potentially profound as improving oil prices not only result in increased cash flows but improved psychology as well.”

Herbert’s analysis is reflected in the industry’s latest earnings. Energy stocks are also on the rise. Houston-based Ion Geophysical’s stock rose 3.96 percent by mid-Friday in trading, and Basic Energy Services, based in Midland, gained 7.14 percent.

But don’t think that those in the oil and gas industry are making out like bandits. Due to the volatility of oil prices, companies have to take precautions. Many companies experience extreme phases of high and low profitability.

As a result, much of the excess revenue made in periods of prosperity is saved and invested in anticipation of lower profits and decreased demand in the future.

The ideal for oil and gas companies is not exorbitant commodity prices, but long-term price stability. Extremely high oil prices will eventually cripple the economy and reduce overall demand.

Many people, students at UH included, complain about “filthy rich oilmen,” saying that the price of gas should be dropped to one or two dollars a gallon. Under the circumstances, such complaints are predictable.

But if the price of oil drops too low, or below $60 a barrel, analysts have warned that the Houston economy stands to suffer. While high gas prices are painful, Houston has it better than many other cities right now because of its close ties to the oil and gas industry.