The Fuse

Seven Cities with Economic Fates Tied to the Price of Crude Oil

by Nick Cunningham | June 12, 2015

Oil is consumed in all corners of the globe, fueling much of modern life. But despite the ubiquitous nature of oil’s consumption, its production is concentrated in relatively few areas. As a result, there are a handful of cities around the world where oil is king, and where their urban economies are at the mercy of the cyclical nature of the business. With so much capital involved, they boom when times are good and contract when boom turns to bust.

Here are seven of the world’s most important oil cities.

Aberdeen

North Sea oil is dwindling and suffers from some of the highest production costs in the world, pushing the industry into survival mode.

As the launching point for oil production in the North Sea, this Scottish city is seen as the energy capital of Europe. By some estimates, over 900 energy-related businesses are in Aberdeen, although in recent years factors both inside and outside of the oil industry have impacted its overall health. The recent (failed) Scottish independence bid was partially based on the promise of oil revenues staying within Scotland—but these oil-fueled dreams of independence were based on an atrophying foundation. North Sea oil is dwindling and suffers from some of the highest production costs in the world, pushing the industry into survival mode.

Meanwhile, Aberdeen stands to reap rewards from Scotland’s ambitious goal of securing 100 percent of its electricity needs from renewables by 2020. Meeting this goal will require establishing a major offshore wind industry, which is already underway. Aberdeen has the potential to be transformed from offshore-oil hub to offshore-wind capital—but for now, with so much of the municipal economy still tied to oil, it has fallen on hard times as it awaits the potential arrival of its next energy boom.

Houston
The capital of the U.S. oil industry, Houston has seen unprecedented economic growth as high oil prices fuelled the shale oil and gas boom. Home to the likes of ConocoPhillips, Halliburton, Baker Hughes, and EOG Resources, Houston’s economy is indisputably built on oil. Unfortunately, this has also left the city in a vulnerable position following the oil price collapse, which has sparked fears of layoffs, falling real estate values, and even the possibility of bad loans straining Texas banks.

So far the city has weathered the downturn better than expected, owing to a more diversified economy than in decades past. Energy still makes up 38 percent of the city’s economy, so the pain of the oil price slump is very real, but its current economic slice of Houston is far lower than the 80 percent share it held during the 1980s.

Calgary
Home to many oil companies operating in Canada’s oil sands, Calgary has been hit hard over the last year. Thousands of oil workers in Alberta have become casualties of the oil price downturn, and the final tally is probably still climbing. For the first time since 2011, Calgary’s residential home prices fell in March 2015, the largest drop of all major Canadian cities. The real estate market, in turn, has raised concerns over the health of Calgary’s banks, which are probably in worse shape than their Texas counterparts.

Oil sands are particularly expensive to develop, which is why a lot of project cancellations in recent months have been concentrated in Alberta. Royal Dutch Shell shelved its plans to build its 200,000 barrel-per-day Pierre River project in Alberta. In January 2015 Cenovus Energy put off plans to expand two major oil sands projects.

Rio de Janeiro

After massive reserves of “pre-salt” oil were discovered off the coast of Rio de Janeiro, Brazil’s then President declared that “God is Brazilian,” in thanks for the bounty. But divine providence is mercurial, if the Brazilian economy is anything to go by.

The discovery of 5-8 billion barrels of oil equivalent in 2007 kicked off several years of seemingly unbreakable optimism. Then came a tug-of-war between Brazil’s provinces and Rio de Janeiro over oil revenue sharing, and before the riches could even be divided up, the twin crises of the Petrobras scandal and oil-price crash cast a dark cloud over Brazil.

Williston
Once-tiny Williston, North Dakota has been utterly transformed over the last few years, thanks to the shale revolution. The Bakken has helped the U.S. catapult to the top of the world’s list of oil producers, and the small town has struggled to keep up with the growth.

As thousands of the newly minted wealthy have settled in Williston, the region has also experienced some of the more unsavory aspects one would expect of a boomtown.

As thousands of the newly minted wealthy have settled in Williston, the region has also experienced some of the more unsavory aspects one would expect of a mythical frontier boomtown. Since the mid-2000s, the population has more than doubled, but inadequate housing has led to skyrocketing rents and a proliferation of man camps. Tax revenues have surged as quickly as the crime rate. The area boasts some of the lowest unemployment rates in the country, but as boomtowns before it, the bust is particularly painful when the entire economy floats on oil. Rigs are disappearing, and so are the oil jobs.

Stavanger

Stavanger isn’t internationally famous, but it’s still home to Norway’s oil industry as headquarters to oil giant Statoil. Unfortunately, the company is cutting costs by 30 percent and has already put several major drilling projects on ice.

For a country that depends on oil for one-fifth of its GDP, it is no surprise that the downturn is taking a toll on the oil capital. Although the unemployment rate in Norway is less than 4 percent, in Stavanger the number of unemployed jumped by 29 percent in January 2015 year-over-year. Across Norway, some 40,000 jobs could be eliminated (out of a total of 250,000 oil jobs nationwide) during the price downturn.

Abu Dhabi
Gleaming skyscrapers, artificial islands, and the creation of a global financial hub were all made possible by the UAE’s oil wealth. The UAE is the sixth largest oil producer in the world, and production is located almost exclusively in the emirate of Abu Dhabi.

Abu Dhabi has sought to diversify its economy, investing in healthcare, education, banking, and security. Still, oil accounts for over half of its GDP. Abu Dhabi’s white-hot property market has cooled off, but the emirate appears to be weathering the oil downturn, at least for now. It doesn’t hurt that its economy has a safety net in the form of a sovereign wealth fund in excess of $770 billion.

 

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