Interactive: Tracking US oil and gas tracts
View an interactive map in this article that follows the opening of hotels in oil and gas markets across the U.S.
The growth of the United States oil and gas industry during the past few years has been a boon to the hotel industry, particularly in remote locations where hotel markets were previously small to negligible. As workers flocked to these areas, they were in desperate need of accommodations. This drove occupancy and room rates to record levels for many rural towns while the rest of the U.S. hotel industry was still in the midst of the recovery.
The chart below illustrates the trend in revenue-per-available-room change for the top 20 market tracts reliant on the boom in the oil and gas industry compared to the overall U.S. (This analysis was conducted by HNN sister company STR Analytics
Top 20 Oil and Gas Tracts: North Dakota Area; Kansas Area; Oklahoma West Area; Oklahoma City North/West, Oklahoma; Oklahoma East Area; New Mexico South Area; Texas West Area; Abilene/Central Texas Area; Texas East Area; Midland/Odessa, Texas; Houston North/Woodlands, Texas; Katy Freeway West, Texas; Houston East/Baytown, Texas; Texas South Area; Louisiana North Area; New Orleans East/Slidell, Louisiana; Louisiana South Area; Ohio South Area; Pennsylvania Central Area; West Virginia North Area.
Beginning in 2008, an enormous number of new hotels were constructed to accommodate the new-found demand base in these areas. Despite the onslaught of new rooms, the hotels filled quickly and room rates continued to grow rapidly while demand levels were still larger than the room supply. However, in mid-2013, occupancy began to slide as supply growth began to outpace demand growth. Moreover, RevPAR performance in the oil and gas regions began to lag the overall U.S. Nevertheless, in mid-2014 it appeared supply and demand were back in balance, and the oil and gas regions would be back on pace with the U.S. hotel industry.
That changed in late 2014 when crude oil prices plunged from more than $100 last summer to below $60 by the end of the year. With the price of oil at that level, the profitability of many fracking operations comes into question. The $60 mark has been noted by many analysts as the reported break-even point for fracking.
While supply growth for the U.S. overall tapered in 2009 and was relatively stagnant while the recovery took hold, supply growth for the markets driven by the oil and gas industry saw significant new supply enter their markets beginning in 2010. Looking at the primary fracking sites in the continental U.S., we overlaid the locations of new hotels that have opened since 2010 to illustrate the volume of hotel development induced by the oil and gas industry.
Click to enlarge.
The interactive map below allows you to click through the time sequence of the past five years of new hotel openings and their locations. The orange dots indicate hotels located in market tracts where the oil and gas industry is the primary demand driver. It is important to note some submarkets might be dependent on the energy industry to some degree (e.g., downtown Houston and downtown Dallas), but the oil and gas industry is not considered their primary driver of roomnight demand.
Hotel development in oil and gas market tracts accounted for an astounding 25% of the new rooms that entered the industry since 2010. These tracts accounted for 47% of the midscale hotels developed in the U.S. since 2010 and 44.5% of the economy hotels built in that time frame. The table below illustrates the volume of new rooms for four of the most prominent oil submarkets received in recent years.
And more supply is in the pipeline. Close to 11,000 new rooms are under construction in the top 20 oil and gas tracts, and another 24,000 rooms are in the planning stages.
Oil prices, production
U.S. oil production has been on the rise since late 2005, long before even the previous economic cycle hit its peak. At that time, the U.S. produced approximately 3.8 million barrels per day. By the end of 2014, we were at 9.1 million barrels per day. Many analysts predicted a slowdown in production for 2015, but the industry maintained its momentum and surpassed 9.4 million barrels per day in mid-March. However, during the past two months production growth appears to have lost momentum and has plateaued between 9.3 million and 9.4 million barrels per day.
With the rise in oil production, we have also seen the rise in demand among major market tracts driven by the oil and gas sector. The chart below illustrates the trailing 12-month room night demand trend for the top 20 oil-dependent tracts in comparison to the level of oil production since 2008.
Similar to the decline in oil production over the past eight weeks, these areas have experienced a decline in roomnight demand. Demand declined 0.3% in March and another 3.5% in April, the first notable demand drop since the recession. The North Dakota Area tract experienced a demand decline of 9% in April. It is too early to tell if this is a shift in the trend, but it might be a possible warning sign of the potential fallout in these regions if oil prices remain low.