Wednesday, November 5, 2008

Falling Gas Prices Aren’t Making Everyone Happy

Oklahoma oil wellsMost of the country is ecstatic that gas prices are falling. Just the other day I was able to fill up my car for less than $50--I know I certainly was ecstatic. But while most of the country is happy to see gas prices fall, there are certain pockets that are going to suffer for it. Texas is the energy capital of the country, and when gas prices are up, cities such as Houston and Fort Worth boom. This was certainly the case of late. These energy hubs continued to boom despite the rest of the country suffering from the credit crisis; it seemed as if they were immune. But now that gas prices are falling, these places are starting to feel the pinch--and it is likely to get worse.

Unemployment is rising in these areas as energy companies start to cut back. Projects that made since when oil was at $140 a barrel just don’t look as good now that it is less than $70 per barrel. It isn’t just unemployment either; many residents in these areas lease their land out to energy companies and depend on these payments to support their lifestyles. You can bet that as these energy companies continue to cut back, businesses in the area--along with the local real estate markets--will suffer. While many of these places avoided the big run-ups in housing prices that were so prevalent throughout the rest of the country during the housing boom, the real estate prices here never really experienced the falls, either. I would suspect that they will begin to fall a bit now, although not nearly as heavily as in most other places in the country.

As jobs dry up and the real estate and business markets contract, investors need to be extra careful when dealing in these areas. The numbers may look attractive right now thanks to low unemployment, low vacancy and real estate prices that have stayed study despite the economic turmoil, investors need to look beyond past performance and into the future. Now that Obama is president-elect, things could get even worse for some of these energy hubs. He wants to make a huge push for alternative energy, which could very well push the price of oil down even further. While some of these places are focused entirely on oil and gas, others are diversified into alternative energy, which would obviously be a preferable place to invest at this point. If you want to invest in these areas, look hard at diversification. Are there many jobs outside the oil industry? If the area is completely dependent on oil and gas, I would suggest you move on (think Fort McMurray in Alberta, Canada).

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