Strong dollar hurting Houston

Major exporters find their costs increasing

WASHINGTON — The steady rise of the U.S. dollar since the presidential election last month is inflicting further headaches on a Houston economy that was already struggling with low oil prices and the end of an export boom.

While a boost for businesses buying goods and services abroad — not to mention U.S. consumers — the dollar’s climb to 14-year highs against other currencies is hitting the bottom line of oil refineries, industrial equipment manufacturers, chemical plants and shipping companies. A stronger dollar makes American products more expensive to buy overseas and imported products cheaper to buy in the U.S.

Low commodity prices, along with sluggish economic growth in Europe and China, were already hitting Houston’s petro-industrial complex. And the rising dollar only adds to that pain, said Patrick Jankowski, senior vice president of

research with the Greater Houston Partnership.

“We’re getting hit from both sides,” he said. “There’s a lot of factors at play. But the high dollars means our customers either purchase less of our goods or they go somewhere else to buy them.”

Since President-elect Donald Trump was voted in last month, a flurry of forecasts of rising U.S. interest rates has helped pushed the dollar up 3 percent — adding to a gain of almost 25 percent since the beginning of 2014. Higher interest rates mean dollar investments pay a higher return, increasing the demand for dollars and pushing up their value.

A pricier dollar has a ripple effect that reduces demand for U.S. products — including Houston’s most important exports, petroleum products — and forces U.S. companies to cut prices or watch their business drift to countries with more attractive exchange rates.

Not long ago, such global concerns might not have weighed so heavily on Houston, but since 2009, exports rose more than 45 percent to $97.1 billion last year, according to the U.S. Department of Commerce. That now makes Houston the country’s largest exporter, just ahead of New York City.

Facing ‘headwinds’

At Omega Protein, the Houston nutritional company, the uptick in exchange rates is causing overseas sales for the company’s fish oil and other products to weaken in certain markets — even as overall business holds steady through growth in other regions, said CEO Bret Scholtes.

“The dollar creates some headwinds,” he said. “But no one’s that discouraged. There’s as much interest in exports as ever before. Everyone’s looking for growth.”

So far this year, exports from Houston are down 19 percent from 2015, according to data compiled by the Houston Partnership. Much of that comes from the massive losses in revenue that the region’s refineries are sustaining, as gasoline and other products sell for a fraction of what they did a few years ago.

Through the first six months of the year, even as volumes held steady, sales on refined products were down 21 percent to $12 billion, according to a report by the Greater Houston Partnership. Likewise plastic sales fell 9 percent to $3.3 billion, even as volumes increased 16 percent.

The strength of the U.S. currency is also putting downward pressure on oil prices since the commodity trades in dollars. When the dollar goes up, it costs oil importing countries like Japan and India more to buy a barrel of crude — reducing demand and moderating prices. If the dollar continues to rise, as many forecast, it could slow the oil rebound. Crude settled at $50.84 a barrel in New York Thursday.

Protective measures

Typically, the exchange rate is a fairly minor factor in a multitude of supply and demand signals that determine how much oil is selling for on the New York Mercantile Exchange. But not always, and larger oil price swings off the value of the dollar are not unheard of, said James Sullivan, a director with the financial comany Alembic Global Advisors.

The run-up to record oil prices in 2008 — peaking at about $145 a barrel — came during a period of a weak dollar, for example.

Large companies like BP, which has its U.S. operations headquartered in Houston, use a complex network of financial instruments like derivatives to protect themselves against sudden swings in exchange rates. Even were the worst to happen, they have substantial cash reserves to fall back on.

But smaller and midsize oil and gas companies, which have driven so much of the Texas shale boom, are not as well insulated, said Praveen Kumar, executive director of the University of Houston Global Energy Management Institute.

“For them, there is really no room to maneuver,” he said. “If the dollar continues getting stronger, which is my prognosis, it might even be the case that the price gains we’ve seen from (the OPEC announcement earlier this month) could definitely be nullified.”

Export boom on hiatus?

As the U.S. economy gains momentum, the Federal Reserve is expected to raise interest rates over the next year, bringing an end to one of the cheapest periods in American history to borrow. At the same time, central banks in other countries are cutting interest rates or holding them at low levels.

Together, these developments likely mean a stronger dollar.

Looking at the forecasts, Jankowski seemed resigned to the fact that Houston’s export boom might be going on hiatus.

“We overtook NYC three or four years ago as the largest (U.S.) export market,” he said. “Maybe at some point, we have to be happy with second place. There’s no shame in that.”