It was during the State of Energy, an annual event hosted by the Greater Houston Partnership, where the dependence on the energy industry was made clear. Whether it is the transport, the food, the manufacturing or the pharmaceutical industry; representatives from various companies and organizations seek to find some certainty on what is about to come in the future, since they are all influenced by the recent downturn in the oil and gas sector. Frankly, the energy sector influences the entire U.S economy.
As the energy capital of the world, Houston seems the right place to host such an event. It is 75miles to the east of Houston at Spindletop, where drillers discovered oil in 1901 which led to the oil boom in Texas. Fortune 500 companies such as Conoco Phillips, Phillips 66, Marathon Oil Corp., Exxon Mobil Corp and Shell Oil Co. contribute as energy companies to the largest cluster in Houston, employing 14 percent of the workforce. The picture looks a bit different when regarding the whole of Texas, where the energy industry accounts for approximately 2 percent of the employment and 9 percent of gross domestic product due to diversification in other sectors of the economy, too. Texas is performing relatively well when comparing to the other States. Reasons are a stronger job growth because of a younger population with relatively strong net immigration. Thus, the Texas Business –Cycle Index, the broadest indicator of the state’s business cycle showed no recession in 2015, indicating weak but positive expansion in employment.
Nevertheless, energy is one of economy’s main drivers in Texas and in the U.S. Texas has a strong oil and gas sector, which is only expected to increase in the coming years. Many coal units retired due to environmental regulations such as the Regional Haze Rule but mainly because of lower oil and gas prices. Wind energy takes up 11 percent of Texas’ energy production and solar has been growing greatly due to declining capital costs.
For many, the downturn in oil and gas prices came as an ‘overnight shock’. In late 2014, oil prices were still around $100 per barrel, in the fall of 2015 this was around $45 per barrel. When prices dropped even lower with $29 per barrel in January 2016, companies had lost 70 percent of their revenue over six months. According to the Dallas Federal Reserve Bank, in 2015 Texas’ oil and gas related employment was weakened 19.4 percent, as well as the manufacturing sector declining 4.1 percent.
Following the example of the different sectors in the state’s economy, diversifying is something which also applies to energy companies trying to succeed in a low price environment these days. According to Ryan Lance, CEO of Conoco Phillips, a diverse portfolio and short cycle times are necessary. Long term planning is risky and difficult in times of greater uncertainty. Diversification can be implemented by including renewable energy in the portfolio as well, and is already experienced now. Apart from that, Lance underlined that cheap and sustainable innovation and identification of hydrocarbons is an advantageous point in the energy industry of Texas. Oil, gas, renewables and other resources all play a role in meeting the challenge of growing demand. In his discussion with former White House Energy Advisor Jason Bordoff at the State of Energy, Lance emphasized that producing everything from what is discovered so far is important. This falls under the ‘all of the above’ option, where a mix of energy resources is favored.
This includes important implications for the future of renewable energy as well. Texas embraces the broad potential of wind and solar resources with a market driven and business friendly approach. It is clear and realistic that renewables will not account for 100% of total energy production: They are part of the solution. The Electric Reliability Council of Texas expects solar to grow with 17% by 2031 under current trends, while wind still remains a very strong renewable energy source. Investing in renewable energy is an option many business in Texas look into and something which will only increase in the next years. The state of the energy market in Texas can be viewed positively with the need of constant awareness of challenges, an open mind and diversification in supply and demand of energy resources.