High Oil Prices Are Cause For Celebration In Texas, But It Could Be Months Before Big Money Flows To CRE

In a widely anticipated move, the U.S. moved to ban imported Russian oil Tuesday as part of an effort to further squeeze the country's economy amid its invasion of Ukraine. But energy experts are skeptical the sanctions, coming amid already-soaring prices at the pump, will lead to boom times ahead for commercial real estate, at least in the foreseeable future.

"We're probably not going to see headlines saying, 'Drill baby, drill.' We're probably not going to go back to the heyday of 2014 or anything like that. The office vacancy rate in Houston is going to remain high," said Jesse Thompson, senior business economist with the Houston branch of the Federal Reserve Bank of Dallas.

Thompson added that after oil companies laid off thousands following Covid-19 and the 2020 oil downturn, offices will likely not be filled anytime soon.

The U.S. is one of the top oil producers in the world and only imports a small fraction of its oil from Russia, according to Bill Gilmer, director at the Institute for Regional Forecasting at the University of Houston. Still, the effects of the Russia-Ukraine War are hard to ignore, considering eye-popping prices at the pump.

In Houston, the energy capital of the world and home to numerous enormous energy headquarters, gas prices have shot up nearly 50 cents over a week to an average of $4 a gallon. The national average hit a record $4.17 a gallon Tuesday, according to AAA, the highest price since 2008.

It seems unlikely sky-high prices will even out soon, experts told Bisnow. But those hoping that big oil profits will lead to large numbers of new hires and more real estate square footage to house them may have to wait months before oil and gas companies decide to make changes, if they come at all.

Higher gas prices theoretically lead to profit for oil companies and an economic boost for Houston as a whole, unlike much of the rest of the country. Praveen Kumar, a finance professor and faculty director at the Gutierrez Energy Management Institute at the C.T. Bauer College of Business at the University of Houston, said shale companies, in particular, are poised to profit after suffering financially, with some declaring bankruptcy, during the twin devastations of the 2020 oil downturn and the pandemic. 

"That's how Houston's oil engine starts to go," Kumar said. "More companies applying for bank loans, so the Houston commercial banking sector is going to get an uplift. You have these chain effects, more money going to bank employees, more money to the economy."

Not every player in the sector stands to benefit, however. For upstream operations, which include the exploration and production of oil and gas, Kumar sees both risk and profit, whereas for downstream operators that convert oil and gas to something usable, like gasoline, there's greater danger.

"For [downstream] it's really going to be a major negative impact, because their profits and returns are, not surprisingly, totally negatively related to the price of crude oil. Oil, basically, is their main import. The higher the price of oil, the less profitable they're going to be," Kumar said.

"We've historically seen that, every time we've had oil price spikes before, like 2008 … the prices had been rising prior to the financial crisis, and downstream companies on the refining, petrochemical side, they were just taking a brutal beating."

Kumar said long-term employment is likely to be positively affected by fallout from the conflict.  But gains would mostly come in the Interstate 10 corridor, he said, where production companies are, rather than in Baytown and Pasadena, which host refineries.

Climbing gas costs look dramatic, but because of the unstable nature of the conflict, with prices bouncing up and down as world leaders discuss sanctions, it's hard to tell now what long-term economic impact the conflict will have on the U.S. energy industry.

It takes months for oil companies to hire, fire or change office footprints after a boom or bust, so it remains uncertain how the industry will change real estate strategies based on the war of unknown duration. Patrick Jankowski, senior vice president of research at the Greater Houston Partnership, told Bisnow the industry should brace for some immediate job losses as well, including those directly involved with Russian businesses, such as engineers, lawyers and translators that deal with or work in Russia. 

Over the past two weeks, most major oil companies, including BP, Shell and Exxon Mobil, which recently shared plans to move its headquarters to Houston, announced they would shut down Russian production or otherwise pull out of the country. Those companies are losing billions in stepping back, but they would be facing a much bigger price tag from sinking consumer opinion if they remained affiliated with Russia, according to several energy experts. The Russian government and President Vladimir Putin have been widely condemned for actions in Ukraine, and now, few believe companies will be rushing back to affiliate themselves with Russia in the future, regardless of how the conflict ends.

"You're not going to see more joint ventures with Russia for a long, long time. A couple years," Jankowski said. "[Companies] are going to be real apprehensive about doing business with Vladimir Putin again. That also means there's going to be less opportunities for Houston companies to sell oilfield equipment and oilfield services over there."

For Gregg Healy, executive vice president and head of Savills' industrial services group, there are too many alternatives for consumers to turn to for companies to not be careful with their image. When Russia's attacks in Ukraine are publicly broadcast in real time on social media, Healy said, companies get nervous about being associated with war atrocities.

"There are so many alternatives out there. You don't like somebody else, you swipe left or swipe right or do something different on everything in their lives," Healy said. "The consumer is more aware and more socially aware, they're spending their dollars with a social conscience."

The war has evolved quickly, and experts were hesitant to place firm predictions on how the situation will evolve. Only weeks ago, experts examining the war were skeptical the conflict would have drastic effects on U.S. oil prices. In a March 1 interview with Bisnow, Jankowski dismissed chatter oil would hit $150 per barrel. On March 8, the price hit $124, and speculation now hovers around the possibility of wilder numbers.

Jankowski has moved his skepticism meter to $200 per barrel. 

"Given events of the past few days, $150 a barrel is likely," he said in an email to Bisnow.

And just as many companies are ready to get back to normalcy and unfurling grand return-to-office plans, the crisis could throw the office market another wrench.

"One of the factors that comes into play in this is that we've learned to work from home," Jankowski said, musing that high gas prices could deter some from jumping back into commuting. "Rather than being in the office three days a week, maybe we go back in the office two days a week, [save] one day of driving. There are all sorts of different ways this could play out."