David G. Kang

Robert W. Gilmer

English

Research Papers in Economics

Houston Business
A Perspective on the Houston Economy
The consolidation 
process continues to
favor urban areas,
especially Houston with
its large pool of workers
and its knowledge 
base. Among oil cities,
Houston now dominates
every segment of the
industry by a very 
wide margin.
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Urban Oil Consolidation: 
An Update
The April 1996 edition of Houston Business
took a detailed look at the geographic implica-
tions of a shrinking number of oil workers, partic-
ularly among cities that traditionally have been
centers of oil-related activity. This article follows
up on the earlier work, updating tables that origi-
nally appeared in 1996. Readers interested in the
history of the consolidation process or the ration-
ale for large concentrations of urban oil workers
are referred to the original article.
1 Data sources,
as well as the interpretation of data, are also dis-
cussed there. The 1993 County Business Patterns
that provided much of the basis for the 1996 article
is updated here, although the latest information
available is for 1997 due to lags in publication.
SUMMARY UPDATE
Table 1 shows U.S. employment in the oil
industry by sector and demonstrates that the
industry continued to shrink through 1999. For
purposes of recent comparison, the two most rele-
vant dates are 1990 and 1997, peak years in the oil
cycle because the domestic rig count topped 1,000
working rigs during both years. Despite returning
to peak levels of activity in 1997, the industry had
50,000 fewer workers than in 1990, reflecting pro-
ductivity gains from technology and improved
management. The decline in the number of jobs
after 1997 may partly reflect long-term trends in
consolidation, but  most of the shrinkage is the
result of weak oil prices and the collapse of
drilling activity in 1998–99.
The 1996 article proposed a list of 29 oil cities
derived from several sources, and we have sincenarrowed that list to 12 cities that can be more
easily tracked over time. These 12 cities,
shown in Table 2, consistently account for well
over 90 percent of the oil jobs of the original
29 cities. The most striking feature shown in
the table is the dominance of Houston in 
every segment of the industry. For the first time
since we have been doing these calculations,
Dallas fell out of the No. 2 position among 
oil cities, displaced by both New Orleans and
Oklahoma City. Midland–Odessa followed Dal-
las at No. 5.
These 12 cities collectively have been
favored by the industry relative to the rest of
the nation (Table 3). The share of oil jobs in
these 12 metropolitan areas grew from 33.9
percent to 43.2 percent between 1990 and 1997,
with the most important urban gains coming
among the knowledge-intensive industry seg-
ments—producers, headquarters and explora-
tion services.
Table 4 highlights Houston’s continuing
rise among the 12 cities. Even compared with
the other large oil cities, Houston has domi-
nated the job consolidation process, growing
from a 35.6 percent share to a 42.4 percent
share during 1990–97. Houston’s role as the
primary knowledge loop for the oil industry
and its large technical labor force provide a
significant lure for oil and natural gas compa-
nies. Again, decision-making and knowledge-
intensive segments have been most prone to
consolidate, and Houston has been by far the
preferred consolidation site.
Finally, Figure 1 plots the share of U.S.
employment held by Houston producers, oil
services and oil machinery industries under
Bureau of Labor Statistics definitions. The data
are monthly after 1997, showing the effects of
the 1997–98 cyclical downturn in drilling and
the slow improvement in drilling activity
through the first quarter of 2000. In the spring
of 1999, both domestic and international
drilling dipped to the lowest levels of the last
60 years.
The downturn clearly hurt Houston’s oil
machinery segment, with local machinery em-
ployment falling faster than in the rest of the
United States. Houston’s share of machinery
employment fell from more than 40 percent 
to less than 35 percent before beginning to
recover. Both local oil service and producer
segments held up better than in the United
Table 1
U.S. Employment in Oil Production, Services and Machinery
(Thousands of jobs)
Year Producers Services Machinery Total
1982 266.0 434.5 112.9 813.4
1987 199.3 196.8 36.4 432.5
1990 191.9 198.3 42.5 432.7
1997 143.8 190.3 46.8 380.9
1999 133.1 156.0 42.9 332.0
SOURCE: Bureau of Labor Statistics.
Table 2
Number of Jobs in 12 Leading Oil Cities in 1997
Producers All services Drilling Exploration Other Headquarters Machinery All oil jobs
Houston 16,884 16,471 3,682 3,670 9,119 23,748 11,393 68,496
New Orleans 5,663 5,185 1,102 82 4,001 2,065 435 13,348
Oklahoma City 4,952 5,274 1,794 213 3,267 1,810 1,055 13,091
Dallas 4,306 1,776 858 651 267 3,765 2,185 12,032
Midland–Odessa 2,884 4,839 909 335 3,595 2,016 385 10,124
Denver 3,919 1,204 415 292 497 3,798 20 8,941
Lafayette 881 6,566 1,191 205 5,170 770 712 8,929
Tulsa 2,495 1,253 486 115 652 3,750 1,160 8,658
Fort Worth 1,098 653 195 80 378 2,738 1,793 6,282
Bakersfield 903 3,847 1,162 6 2,679 850 175 5,775
Los Angeles 1,430 1,414 113 15 1,286 1,007 139 3,990
New York 101 193 175 0 30 1,209 0 1,503
Total 12 oil cities 45,516 48,675 12,082 5,664 30,941 47,526 19,452 161,169
United States 106,325 162,293 44,825 9,313 104,144 76,251 28,098 372,967
12 cities:
Percent U.S. 42.8 30.0 27.0 60.8 29.7 62.3 69.2 43.2
Houston:
Percent oil cities 37.1 33.6 30.5 64.8 29.5 50.0 58.6 42.4
NOTE: Differences in sources and definitions account for the variances in 1997 U.S. job figures reported in Table 1 and Table 2.
SOURCES: County Business Patterns; authors’ calculations.States overall, however, and gained significant
market share during the downturn.
CONCLUSION
The trends observed in the 1996 article
remain quite strong. The industry’s employ-
ment base continues to shrink, driven over the
long term by significant advances in technol-
ogy, such as three-dimensional seismic, hori-
zontal drilling and subsea completions. It is
now possible to do more work with fewer
people. The consolidation process continues to
favor urban areas, especially Houston with its
large pool of workers and its knowledge base.
Among oil cities, Houston now dominates
every segment of the industry by a very wide
margin. A second tier of oil cities consists of
New Orleans, Oklahoma City, Dallas and Mid-
land–Odessa, but these are now too small—
measured as oil centers—to be regarded as
potential rivals to Houston.
— Robert W. Gilmer
David G. Kang*
*David Kang will enter Harvard University to
study economics in the fall.
NOTE
1 Gilmer, Robert W., and Jun Ishii (1996), “The Oil Indus-
try and the Cities: Consolidation in the Oil Extraction
Industry,” Federal Reserve Bank of Dallas Houston Busi-
ness, April, 1–7. This article is available on the Internet at
www.dallasfed.org, under the Publications section.
Table 3
Twelve Oil Cities as a Share of U.S. Oil Employment
(Percent)
Sector 1987 1990 1997
All oil 35.7 33.9 43.2
Producers 21.0 22.9 42.8
Headquarters 58.2 47.6 62.3
All services 26.3 29.4 30.0
Drilling 23.1 27.6 27.0
Exploration 40.6 60.7 60.8
Other 26.9 26.3 29.7
Machinery 66.6 66.9 69.2
SOURCES: County Business Patterns; authors’ calculations.
Table 4
Houston Jobs as a Share of 12 Oil Cities
(Percent)
Sector 1987 1990 1997
All oil 34.6 35.6 42.4
Producers 27.0 25.9 37.1
Headquarters 34.7 36.8 50.0
All services 30.0 33.0 33.6
Drilling 30.7 37.8 30.5
Exploration 39.5 45.0 64.8
Other 27.3 27.2 29.5
Machinery 54.4 54.7 58.6
SOURCES: County Business Patterns; authors’ calculations.
Figure 1
Houston as a Share of U.S. Oil Production, Services and Machinery, 1996 to Present
Percent
Machinery
Services
Producers
0
5
10
15
20
25
30
35
40
45
Jan.
’00
Oct.
’99
July
’99
Apr.
’99
Jan.
’99
Oct.
’98
July
’98
Apr.
’98
Jan.
’98
’96
SOURCE: Bureau of Labor Statistics.H
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For more information, contact Bill Gilmer at (713) 652-1546 or bill.gilmer@dal.frb.org.
For a copy of this publication, write to Bill Gilmer, Houston Branch, 
Federal Reserve Bank of Dallas, P.O. Box 2578, Houston, TX 77252.
This publication is available on the Internet at www.dallasfed.org.
The views expressed are those of the authors and do not necessarily reflect the positions
of the Federal Reserve Bank of Dallas or the Federal Reserve System.
T he Houston economy continues to ex-
pand, with job growth running at a 2.6 percent
annual rate for the first half of this year. Oil
and manufacturing employment have yet to pick
up strongly, a normal lag behind rising drilling
activity, but these sectors should contribute
strongly to job growth in the second half of the
year. The Houston Purchasing Managers Index
has been over 60 throughout the second quar-
ter, indicating solid growth and particularly
reflecting strength in oil and manufacturing.
CRUDE OIL AND NATURAL GAS PRICES
The price of West Texas Intermediate
crude held steady near $30 per barrel for most
of the last two months, with OPEC having
committed to increase crude supplies if prices
stayed above that level for 20 days. OPEC
reneged on that commitment in early June,
then provided only 710,000 barrels per day of
additional production following its June meet-
ing. Prices bounced up to $32–$33 per barrel,
then fell back to $28 as Saudi Arabia surprised
the market with a unilateral offer to raise pro-
duction by another 500,000 barrels per day.
Natural gas prices fell below $4 per thou-
sand cubic feet, as cool weather in the Mid-
west and Northeast reduced the need for
natural gas to generate electricity. Fears of
electrical power outages and brownouts this
summer have been greatly reduced. Although
natural gas storage is 20 percent below last
year’s levels, storage has been steadily refill-
ing over the past several weeks.
GASOLINE AND REFINING
Spot wholesale gasoline prices peaked at $1
per gallon in mid-June and have since fallen
back to 87 cents. Gasoline inventories are still
low, but the driving season has not been as
strong as expected, perhaps due to consumer
resistance to higher gasoline prices. Growing
inventories of gasoline, along with crude and
natural gas, led some respondents to point to
the end of the current bull market for petroleum.
Refiners enjoyed excellent margins through-
out the last two months, and they operated at
high levels to take advantage of the profits.
PETROCHEMICALS
Ethylene and propylene producers have
enjoyed strong demand and low inventories
for several months, allowing them to pass
through much of the higher feedstock costs
and to protect their margins. Plastics produc-
ers farther downstream have had less success
in passing along their higher costs. In the past
few weeks, however, growing inventories
have changed the picture for ethylene and
propylene producers, limiting their ability to
pass through price hikes. Increased produc-
tion capacity and slower economic growth
were both cited as reasons for higher inven-
tory levels.
OIL SERVICES AND MACHINERY
Domestic drilling is growing faster than
was generally anticipated. The domestic rig
count recently hit 950, and offshore drilling 
in the Gulf of Mexico now exceeds the last
peak period in early 1998. International
drilling has been expanding since January but
remains at relatively low levels. The weak
international drilling market means that U.S.
capacity geared to supply overseas markets
remains idle. The weak market also hurts pric-
ing. For example, day rates for offshore rigs
in the Gulf remain relatively low because for-
eign rigs stand ready to move to the United
States for work. Finding enough capable
workers is cited as the biggest constraint on
further activity.
FINANCIAL SERVICES 
Respondents continued to be optimistic
based on their performance so far this year
and on the near-term outlook. Several noted
that the recent dip in interest rates had
increased activity, as borrowers rushed back
into the market to take advantage of lower
rates. Most comments, however, centered on
the strong continued consumer demand, the
ability to lend in the face of rising rates and
the lack of deterioration in loan quality. Real
estate lending experienced the slowest growth,
but overall loan growth is very favorable.

Urban oil consolidation: an

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