For boom-bust oil towns, coronavirus is a very different kind of crisis
The combination of coronavirus and the Saudi oil price war is already creating a world of pain for the cities that are dependent on the energy sector
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Greg Nino would prefer to see oil prices climb.
A real estate agent in Harris County, in the suburbs of Houston, Nino’s customers aren’t usually the highly-paid engineers and businesspeople based in the city’s corporate center—they’re the core of the oil sector’s workers, schoolteachers, and small business owners. But the oil and gas sector has a way of impacting everything in Houston, even after years of economic diversification nurtured thriving health care and education sectors.
“One way or another here,” says Nino, “people are tied into oil and gas.”
Now, with volatile oil prices repeatedly falling to multi-year lows—in late March, oil prices hit 18 year lows, sometimes dropping below $20/barrel—oil cities are bearing the brunt of a double-hit faced by no other industry. Alongside disruptions to drilling and refining operations caused by the spread of COVID-19, the lockdowns across broad swathes of the world have suddenly eliminated millions of barrels per day of oil demand. It’s a drop in demand unlike any seen before.
Making matters worse, a fall-out between Saudi Arabia and Russia has resulted in the Kingdom abandoning production cuts that helped prices rise since the last price crash, in 2014—and unleashed more oil on a world that needs it less than ever. The twin forces of too much supply and too little demand have largely sent prices in one direction: down. Even if OPEC+ reaches a deal to cut production in the coming days, analysts say it is unlikely to reverse the demand shock and significantly boost prices in the longterm.
For oil cities—the corporate, manufacturing, and services hubs that the sector revolves around—that has enormous knock-on effects. Past price crashes have produced widespread layoffs and bankruptcies, sunk local real estate markets and drained public funding for years. This time around, local officials and analysts say it could be even worse.
There are already signs of what’s to come. In March, as Houston started to weigh social-distancing measures, Nino was still running open houses and talking to potential buyers. He had good reason to—February was a record-setter for home sales, and within weeks, Houston’s real estate market would enter a complete shutdown, with no showings at all. But when it came to getting clients pre-approved for mortgages, the banks—and real estate agents—started asking a lot of pointed questions. Do the buyers work in the oil sector?
Suddenly, a bidder from a big corporate oil company was no longer a great bet, he says, compared to someone who owns, say, a pawn shop.
“Ordinarily it’s the complete opposite,” says Nino. “I would take the guy from Halliburton all day over the guy from the pawn shop.”
Good times, bad times. Repeat
Oil economies are inherently boom and bust.
Enduring the cycle of good times—with employment, wages, real estate and other indicators surging far ahead of just about everywhere else—and then reversing, is a rite of passage for many in the sector. Older oil employees interviewed for this story recounted layoffs and survival through previous busts; younger employees recounted being hired immediately after the wreckage of a bust, cruelly aware they were getting a job someone else recently lost.
Memories remain fresh of the last bust, triggered in 2014 by a Saudi Arabia determined to take back market share from the ascendant U.S. shale industry, which had shifted the country from the world’s greatest oil customer, to one of its largest producers. That crash meant that while the rest of the West has largely been in one economic super cycle since 2008, regions dependent on the oil sector have instead seen two: one starting after the financial crash, and another beginning in 2016, as prices began to recover due to a coordinated effort by OPEC to cut production, after failing to push the shale sector under.
The crash of 2014 unleashed layoffs, and cuts to production and investment budgets for years, a particularly painful shock for the world’s oil-dependent economies.
A ‘historical’ bust
In the greater Houston area, a metropolitan area with nearly 7 million people and a GDP approaching half a billion dollars—nearly even with Thailand—at least one third of local GDP is dependent on the oil sector, the Greater Houston Partnership, a local chamber of commerce, said in 2018. Counting the vast services funded by those workers, from grocery stores to movie theaters, that GDP dependence is likely far higher, the partnership said—despite the city’s diversification in recent years, becoming a hub not just for oil and gas, but for healthcare, IT, and public education.
Those industries collectively fueled, until even earlier this year, one of the country’s fastest growing cities, with a red hot labor market—in October 2019, the greater Houston region hit a record-high for non-farm employment, with an unemployment rate of just 3.5%. Now, the city is weighing how hard it’s going to be hit. Following the price drop, companies including Apache Corp. and Halliburton quickly announced they would furlough workers, and Whiting Petroleum was the first company to file for bankruptcy, last week, alongside vast redundancies across the hospitality, services and restaurant sectors.
In March, the Greater Houston Partnership said PMI figures from February indicated the city was already on the edge of a contraction. But in the last two weeks, more than 400,000 Texans have filed for unemployment benefits, a figure that’s expected to grow.
The economic hit is impacting every sector, but the impact on the oil industry is compounded. With some regions known for stashing oil wealth away for a rainy day—the Norwegian Sovereign Wealth Fund being the most obvious example—many others, even with savings, have built their public investment and funding around oil price levels, and corresponding growth, that suddenly seem completely out of reach.
“The scale of this bust is historical, in terms of its scale and its speed,” says Daniel Raimi, a senior research associate and expert in the oil and gas sector at the think tank Resources for the Future. “It’s not just the workers that will struggle, but the governments, that have been investing on the assumption that their populations will grow, or even be stable.”
Unfamiliar consequences
This year was supposed to go well for Stavanger.
Norway’s oil city, situated on the country’s northwest coast and home to the headquarters of Equinor, the state energy company, had finally come back from the previous oil crash, and was seeing a boom in production and exploration drilling—even as the country as a whole debated whether there would be, or should be, a future in oil production.
Employment had recovered, sitting at a just 2.5% unemployment rate—the same level as before the 2014 crash.
“The situation a few months ago was quite optimistic,” says Egil Hollund, the communications manager at the Stavanger Chamber of Commerce. “It’s actually been optimistic for the last two to three years.”
Now, Hollund spends his mornings producing a daily television update to run through the economic hit due to coronavirus—from museums to restaurants—and keeping watch as the number of furloughs rise. By April 5, the country had at least 5,600 cases of coronavirus, according to the state broadcaster, including an early case on an offshore oil rig.
Businesses as a whole are worried, he says. By the end of March, more than two-thirds of local companies said in a survey that the economic hit from both coronavirus and low oil prices would have serious consequences, including layoffs and potential bankruptcies. By early April, about 5% of the energy sector had already been furloughed—with the government stepping in to pay their salaries. Unemployment had skyrocketed, from the pre-crisis 2.5%—to over 10%.
And though the cuts in the years since 2014 have made the sector more lean—some Norwegian projects have breakeven points in the low $20/barrel range, far lower than those in the U.S. shale sector—Hollund says this crash is simply on a different scale.
“If you compare this thing to the crisis in 2014, 2015, the consequences and how to deal with it were more familiar,” he says. “This is something no one has experienced before.”
‘A double wave’
Calgary never really recovered from 2014.
While many other oil cities saw their economies gradually rebound with the price of oil, the city was left with a problem: the U.S. is the market for about 96% of Canadian oil, and the U.S. no longer really needed it.
Beginning in 2010, the shale boom, centered around west Texas, had come to break record after record for oil production. In November 2019, the all-time record, the U.S. produced nearly 12.9 million barrels/day of crude oil, according to the U.S. Energy Information Administration—up from just 5.4 million barrels in January 2010, and nearly even with Saudi Arabia’s current target of 13 million barrels/day.
Meanwhile, political and environmental debates within Canada blocked the construction of pipelines that would have carried Albertan oil to the coasts, and customers in Asia. The result is a region that already saw dwindling demand—and was forced to sell its barrels at a sharp discount to global crude prices.
Given that the sector makes up at least 30% of the broader province’s GDP, in the years since, the crash and its aftermath have hit employment hard—in 2019, Calgary’s unemployment rate was 7.2%, compared to the average of 5.6% for the previous twenty years, according to the city council. The price fall also depressed the real estate market, and hit education and healthcare budgets.
“Because we’re almost a one-business, or one-industry, city, you see that having a pretty negative impact on public services too,” says Aaron Foyer, a former geologist who now works as a management consultant, and runs an energy focused newsletter. “You saw the private side hit, and now you’re seeing the public side get hit.”
This fall, the city council was hoping Calgary could turn a corner, admitting that a return to job creation in the region had previously had “false starts.” Its economic forecast predicted oil prices would stabilize, and that growth in the services sector would help offset the still-slow growth in jobs that produce goods, including the oil and gas sector. But while healthcare and social assistance jobs have been the greatest contribution to job growth in recent years, provincial budget cuts meant employment in those fields were likely to decline, too, the council said.
In other words, the current oil price crash has had terrible timing.
“It was like a double wave that hit on the day they announced the Saudi-Russian price war,” says Foyer, who said the economic toll for the city was only starting to really sink in.
“I think we’re in for a rough couple of years.”
‘We were almost there’
In the years after 2014, Aberdeen was determined to change.
The Scottish city, which—like Stavanger—serves as a jumping-off point for the North Sea oil industry, saw more problems in its future than just one oil crash.
Not only had the price fall ripped through the economy, eliminating work for everyone from offshore rig workers to taxi drivers, there were signs the North Sea itself was on the wane. As a “mature” oil region, production was expected to decline, and some of the largest oil companies were selling off their assets, looking to new sources of oil—including the Permian basin at the heart of the shale boom.
And then there was the issue of climate change. The city was keenly aware of its commitments as part of the U.K, which in 2019 legally committed to lowering emissions to net-zero by 2050. For a city dependent on a fossil fuels sector that has historically kept wages, and employment, far higher than the rest of Scotland, it was obvious that a dramatic transformation would be required.
Aberdeen decided to focus on hospitality, tourism, and culture, pouring funds into an art gallery and stoking the city’s restaurant scene. Those helped, but it was really the rising oil price that brought employment back to near-pre crash levels, according to documents from the local council.
“It feels like we went through a lot of pain over the last four, five years, and we were almost there,” says Douglas Lumsden, a city councillor in Aberdeen who previously worked in IT in the oil and gas sector. “It was really a tough time. A lot of people had lost their jobs.”
While oil cities have long been told to diversify their economies and end their reliance on oil prices, one of the cruel ironies of the coronavirus fall-out, points out Lumsden, is that it hit the city directly where it had tried to branch out: crushing its tourism sector and closing its restaurants and museums overnight.
When it comes to climate change, too, Lumsden is worried.
“It’s not so long ago that climate change was dominating the news,” he points out. Even some oil companies were pledging to lower their emissions, including the British energy giant BP, which committed in February to hitting net-zero by 2050. “You have to make sure it doesn’t get forgotten.”
Addressing climate change would be a threat to the city’s current economy. But it could also open up an opportunity—a chance to thoughtfully repurpose the sector’s engineering know-how and North Sea location to become a major hub for vast offshore wind projects in the North Sea.
Climate experts have pointed out that this crisis could offer an opportunity for dramatic intervention when it comes to transforming energy sources and our economies once the recovery begins. But with oil companies’ revenues falling off a cliff, and the cities that rely on the sector already feeling the pain, it’s just as likely that the momentum behind making a change could be lost, too—posing larger questions for the eventual fate of oil cities, even when, or if, prices recover.
“Everyone was keen,” on the city’s transformation, says Lumsden. “And it’s just a shame that all of that is put on hold by this crisis.”
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