The decline in oil prices, “bah humbug”…

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In the last few months, oil prices have declined significantly. At first, we barely noticed the shift beyond slightly lower prices at the pump. More recently, the slide has been pronounced as the benchmark West Texas Intermediate Crude (WTI) dropped from a 2014-high of $106 per barrel in June to $55.00 just last week.

While this is an important national topic, the concern here in Texas is palpable. To borrow from the Dickens’ classic, this rapid price decline is like the Ghost of Christmas Past. We have all seen wicked oil price declines before that have disrupted our local economies, and even though the mid-1980s collapse is long ago, that specter continues to haunt us.

For DFW, energy is still an important part of our economy. But in 2014, we are a very different region. As the Ghost of Christmas Present reminds us, our economy is much more diverse than it was even back in the 1990s. We can see that in the variety of major industries that call DFW home and the range of companies that grow and expand here. Technology, financial services, banking, and the like are all now drivers of our local economy. In fact, according to Moody’s Analytics, Dallas’ diversity index is 0.80, making us one of the most diverse large markets in the US. Granted, Fort Worth has greater energy ties (reflected in its lower diversity score of 0.65), but the DFW Metroplex is a solid economic engine.

Like in Dickens’ story, the most feared visitor that night was the Ghost of Christmas Yet to Come. This is because of the unknown – and that is exactly where we are today with oil pricing. Although there are “forecasts” out there, no one really knows where pricing will end up and how long it will remain low. Given the supply pressures globally and the pricing of oil futures, we are likely in for a period of lower energy costs, with $70 to $75 per barrel common.

This will make some energy companies uneasy as they reconsider their investment appetites. Big companies will be forced to cut back on capital spending and reduce exploration budgets, while some small and medium-size companies will feel sufficient “distress” to force them to raise cash by either unloading property or selling out completely. For some markets, we will see slower job gains as companies accommodate this new equilibrium.

Like the message of the Ghost of Christmas Yet to Come, we must remember that this all is a good thing for the economy. The lower energy costs are expected to add as much as 0.4-percentage points to national GDP growth next year. These lower costs will also fuel consumer spending – a key component that has been slow to rebound in this recovery so far.   To put this in perspective, the US Federal Highway Administration estimates that a dollar decline in pump prices translates into an additional $1,000 annually in the average household’s wallet. That is a sizable bonus to everyone, especially lower income households where energy makes up a large part of their monthly budget.

So, forget the “bah humbug”, and like Scrooge suggested to Bob Cratchit, we should all go out any buy a new coal-scuttle – especially since our energy costs are lower…

 

About the author  |  Research Director Walter Bialas

Bialas is a seasoned real estate professional with more than 25 years of creative problem-solving experience in the consulting, banking, and development industries. He has comprehensive knowledge of all the major markets and property types, as well as a particular strength in quickly assessing market dynamics and their implications on project feasibility.

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