Houston's Pipelines of Prosperity
June 23, 2008

Monday, June 23, 2008
Page A01

Houston's Pipelines of Prosperity
In Oil Industry Hubs, High Energy Costs Bring More Growth Than Pain

HOUSTON -- Soaring oil and gas prices may be a fiscal drag for much of the nation, but here in the self-styled energy capital of the world they are feeding an economic surge.
In nearby Texas City, dozens of contractors' trailers are lined up outside the gates of massive oil refineries and petrochemical plants, evidence of the billions of dollars in upgrades going on inside. Machine shops have more work than they can handle. And students from the local community college are being snapped up for $30-an-hour plant operator jobs, sometimes before they complete their two-year training programs, part of an intensifying scramble for qualified workers.
Employment in the Houston area has grown 2.8 percent in the past year, the highest rate among the nation's 39 largest metropolitan areas and more than nine times the national rate. Area building permits are up, along with the amount of cargo moving through local ports. More than 1,800 oil and gas rigs, many of them belonging to the vast energy companies headquartered here, are in operation across the country, the highest number since the mid-1980s.
"Things are hitting just right," said Alan Hutchins, vice president and general manager for A&A Machine and Fabrication, a La Marque, Tex., firm whose business has doubled in each of the past two years, leading executives to advertise as far away as Detroit and Chicago in search of skilled machinists. "With the price of oil where it is, the companies are going to keep these plants running. They are making that money and investing it back in the plants."
All of the activity is leading to strong retail sales, increasing tax revenue and an uptick in housing prices -- in short, the opposite of what is happening in most of the country, which is being squeezed by flagging consumer confidence and high gas and oil prices.
Other corners of the country are also thriving because of high energy prices. Coastal areas of Louisiana within reach of the gas and oil rigs in the Gulf of Mexico are prospering. Areas of the Mountain West such as Wyoming have ridden rising prices for their natural gas and coal to several years of robust economic growth.
But few places have flourished like Houston, home to hundreds of oil exploration, engineering and oil service firms, including such giants as Baker Hughes and Halliburton. Although consumers here also struggle with $4 a gallon gasoline and soaring utility and food bills, the local economy has been buoyed by the huge influx of money into the energy sector, which accounts for nearly half the jobs.
"We know that everybody is talking about a recession in the U.S., but we're not experiencing that here," said Tracye McDaniel, executive vice president of the Greater Houston Partnership, a business development group. "We exist in this bubble, if you will."
The good times are reminiscent of the early 1980s oil boom, which ended suddenly when the price bubble popped. Then, as now, exploration soared as oil prices shot up. People from out of state migrated to Houston to share in the bounty. But when the price of oil tumbled, bottoming out at $10 a barrel, it took the local economy with it, as home prices plummeted and unemployment skyrocketed.
But economists say this time is different. Although a lack of supply fed the last oil boom, this time energy prices are largely being driven by global demand, which economists say is unlikely to ebb substantially in the near future. And Houston's oil industry has gone global. Many of the jobs here are related to the increasingly high-technology work of pinpointing oil and gas reserves around the world, and designing and making the tools to tap them rather than the dangerous and backbreaking work of manning oil and gas rigs.
"To the extent that Houston is the energy capital of the world, [it] is not because we have a lot of hardhats, but because we have a lot of technology," said Barton A. Smith, director of the Institute for Regional Forecasting.
The Houston economy is far more diverse than it was in the 1980s. Although energy has been the biggest engine in the Houston region's economic surge, it is not the only one. The city is also home to the Texas Medical Center, a collection of 46 hospitals, research centers and medical schools that together employ more than 73,000 people in an industry that is largely immune to ups and downs of the economy. Back in the 1980s, energy accounted for about 70 percent of the jobs here.
In addition, the city never attracted the level of speculation that jacked up home prices elsewhere, so the national real estate shakeout has had little effect. Also, the weak dollar has bolstered exports at the port here, the nation's second busiest.
Some business leaders in the Houston area worry whether energy prices are going too high, bringing unwanted political pressure and scrutiny. "The price of oil is probably getting too high to make things work as well as they could for the refining and chemical business," said Matthew T. Doyle, a banker and mayor of Texas City. At some point, the high prices could dampen demand, he worries.
It already has raised the cost of doing business. Anadarko Petroleum of Houston finds itself having to pay signing bonuses to remain competitive in the market for petroleum engineers, geologists and other skilled workers needed to find and extract oil and gas around the world.
"Our company is probably advantaged more by a more modest price environment," said James T. Hackett, chief executive of Anadarko, which operates in a dozen countries. "One advantage of higher prices is that you can afford to go to more remote areas of the world to find oil and gas. But you don't need $130-a-barrel oil to do that."
Despite the worries, high energy prices seem to be good for business, at least for now. The many exploration and engineering firms headquartered here have seen a surge in business, as high prices make deep-water drilling and other more expensive forms of exploration and extraction economically feasible. Local energy consultants are cutting deals across the globe to sell their expertise in assessing the potential of natural gas and oil reserves. The number of jobs in Houston tied to energy exploration has increased more than 15 percent in the past two years, according to the Institute for Regional Forecasting. Work on alternative energy sources, including wind and solar, also has increased.
Meanwhile, makers of energy-related products -- including pipeline parts, specialized boats that service drilling platforms, high-pressure drill bits and seismic instruments -- are experiencing an upturn in business that has led to an increase in manufacturing jobs in Houston.
A similar surge is evident in other places where the economy is closely linked to the oil and gas industries. Coastal areas of Louisiana, including St. Mary, Lafourche and Terrebonne parishes, are experiencing strong growth in wages and employment, even as the rest of the state feels the effects of the national economic downturn. "Some of this is Katrina rebuilding related," said Dek Terrell, director of Louisiana State University's Division of Economic Development. "But most of it is gas and oil."
In Wyoming, officials expect strong growth to continue for the foreseeable future, or as long as natural gas prices remain high. State revenues are running 15 percent ahead of projections. The biggest problems facing officials are an acute shortage of workers and a surge in home prices, which are propelling a sharp increase in Wyoming's inflation, now running well ahead of the national average.
"We're moving ahead full steam," said Buck McVeigh, administrator of the state's Economic Analysis Division. "With natural gas prices the way they are now, it is hard to say anything bad about the economy here."
Jimmy Hayley, chief executive of the Texas City-La Marque Chamber of Commerce, has a similar view. Just three years ago, things hit a major snag as hurricanes Rita and Katrina damaged oil platforms in the Gulf of Mexico. Also, a 2005 explosion at the huge BP refinery in Texas City killed 15 people and injured 180, making it the nation's worst industrial accident in more than a decade. But since then, oil and gas prices have soared, and the oil and petrochemical companies have spent billions to upgrade their plants and restore their drilling platforms.
That spending is evident in Texas City and La Marque, in newly renovated office space at previously wheezing strip malls and in the new waterfront subdivisions within a few miles of the refineries and petrochemical plants. After rejecting a big bond issue several years ago, voters recently passed a $122 million issue to build and renovate schools in Texas City.
"The workers inside those gates make good money," Hayley said, as he pointed toward the huge row of oil refineries on the horizon. "That makes them more willing to spend on other things."
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