In the New Houston, Oil Is No Longer King

Even before Hurricane Katrina kicked the price of crude last week above $70 a barrel, this city built on petroleum’s slippery fortunes wasn’t caught up in the latest oil boom.

In a town once known for its extreme financial highs and lows, the old manic feeling has been replaced by a more muted sensation thanks to a concerted effort during the last two decades to diversify the economy.

Houston’s “source of wealth has less to do with natural resources and more to do with human resources and knowledge,” said Stephen Klineberg, a Rice University sociologist who has conducted an annual study of Houston attitudes for the last 24 years.

Now, the nation’s fourth-largest city is bracing for an influx of tens of thousands of hurricane refugees, which will strain public resources, including police and schools. There also will be opportunities for hotels and office buildings, previously beset by high vacancy rates, and for other businesses that will supply Houston’s newest residents.

But the most significant effect may be at Houston’s port, said University of Houston economist Barton Smith. Until Gulf Coast ports are operating again, Houston’s docks will take much of the diverted agricultural and other cargo from ports that include New Orleans; Gulfport and Pascagoula in Mississippi; and Mobile, Ala.

This new traffic pattern began in earnest Thursday, when the cargo ship Indotrans Flores couldn’t make its scheduled calls at New Orleans and Pascagoula and was diverted to Houston. Port officials said 3,000 tons of rubber and 2,000 cubic meters of timber destined for Oklahoma were unloaded.

At the same time, Houstonians note the irony that they’re paying the same high gasoline prices as other cities without enjoying the benefits of the days when its economy was oil-based.

“Houston’s going to suffer right along with the rest of the nation,” Smith said. “Fuel prices are going to be high, and that’s going to cut into the household budget.”

That’s because Houston, established more than 100 years ago by a world-famous gusher known as Spindletop, is a much different city from what it was during past booms and busts.

The city remains the epicenter for the global energy industry, according to the Greater Houston Partnership, which is Houston’s chamber of commerce and expert on economic development. Fifteen of the nation’s 20 largest petroleum products and crude oil pipeline operators, controlling 44.2% of U.S. capacity, have corporate or divisional headquarters in Houston.

But petroleum-related businesses account for about 48% of the export-oriented jobs in Houston, down from nearly 80% more than 20 years ago, partly because of rising costs and improved productivity, said Adrian Sanchez, regional economist in Dallas for the Federal Deposit Insurance Corp. The number of employees in the oil-related workforce has fallen by 30% since 1982 to 105,000 from 150,000, said Ray Perryman, an economist at Perryman Group in Waco, Texas.

“There is a new breed of wealth in Houston, Texas,” said Martha Turner, founder of Martha Turner Real Estate Agency, which handles some of the most expensive homes on the market here. “The wealthy buyer in Houston is no longer the person who is in oil.”

At the city’s landmark eateries, such as Damian’s Cucina Italiana, limousines and five-course dinners are no longer commonplace. And in the housing market, prices are barely moving upward compared with the hyper-appreciation of the oil days. Back then, a hike in oil prices would immediately inspire big-ticket purchases.

“When everyone else was having Carter malaise in the 1970s, the price of Texas crude increased tenfold,” Rice University’s Klineberg said. In 1980, oil prices jumped to $38. Adjusted for inflation, it was more than $90 in 2005 dollars -- and the evidence of that good fortune was everywhere.

“A person would put a contract down on a home, plan to close 60 days later, and by the time they closed they had profit in the house,” Turner said. “That’s how fast the prices were going up when oil was going up and up.”

But it couldn’t last, of course. Houston’s economy collapsed in 1982, bottomed out in 1987 and went through a mini-bust in 1999. And then in 2001, even as the city’s alternative businesses were attracting attention and new residents, the city was hit broadside with the collapse of Enron Corp. and its 6,000 jobs.

Nowadays, Houston’s economic activity more closely resembles that of other large U.S. cities. Its 1.4% employment growth this year is lagging only slightly behind the national rate of nearly 1.8%, Smith said.

“We’re doing average,” he said. “Certainly, not better than average.”

The dominance of energy companies has been tempered by a broad base of businesses, including professional services, such as lawyers, and medical research facilities.

“We’ve seen a lot of other industries sort of step up to the plate, outside of the energy sector,” economist Sanchez said.

Houston’s downtown medical center is the largest employer in a city of 2 million. Traditional Southern-based law practices have had to make room for satellite offices of New York and Chicago firms.

“There’s been a natural need for attorneys in the area,” said John Powell, managing director of the Houston office of Los Angeles-based BCG Attorney Search.

For many, Enron’s heady days before the crash marked the end of the era when Houston’s fortune rose or fell with the energy industry.

“It makes my stomach turn when I think about every American Express card that came through here with Enron Corp. on the bottom,” said Bertha Sabir, manager of Damian’s Cucina Italiana. “Those people spent money like water. They’d be here for hours. We would sit here and wonder, ‘Are they ever going back to the office?’ ”