Oil companies slow spending at rapid pace Crude production, though, unlikely to slow and will keep prices low

T. Boone Pickens, chairman, chief executive officer and founder of BP Capital T. Boone Pickens, chairman, chief executive officer and founder of BP Capital Photo: Joshua Roberts Photo: Joshua Roberts Image 1 of / 1 Caption Close Oil companies slow spending at rapid pace 1 / 1 Back to Gallery

Oil company executives are finally heeding the advice T. Boone Pickens gave back in October: Stop drilling.

The rig count is dropping at a precipitous pace, capital budgets are a fraction of last year's and debt-laden companies are selling assets to those with fat balance sheets. Smart management teams are no longer talking about crude prices recovering anytime soon. In fact, the evidence points to potentially lower prices for both oil and natural gas.

The problem is that there are too many wells producing too much oil and natural gas, and cutting the number of rigs drilling new wells will do nothing to cut that supply. This month's report from the U.S. Energy Information Administration shows that production in the Marcellus shale region continued to rise long after companies stopped drilling new wells.

Therefore, if the problem is one of supply, the reduced capital expenditures on new drilling will not help lift prices. Balance this with OPEC's commitment to maintaining current production levels and more oil coming out of Russia, and there is little change in global supply to impact price, even with geopolitical problems like the current fighting in Libya.

Demand is also unlikely to solve the problem. The U.S. economy is growing, but the rest of the world is lagging. The debate now seems to be over whether the U.S. will pull the rest of the world out of its slump or if China's slowdown will put a drag on the U.S. economy. We're in an interesting situation as China, now the world's second largest economy, stops growing and behaving like an emerging market and make the transition to a mature economy that can no longer be relied upon to drive global economic growth.

Demand for natural gas is also flagging, thanks to a warm winter and over-production in North America. A glut of natural gas has led to dramatically lower prices, which means no one will be using the surplus drilling rigs to look for more gas anytime soon.

All of this data points to possibly lower oil prices, with some predicting sub-$50 a barrel prices for West Texas Intermediate. That would bring even more pain to Houston, where nearly half of all jobs are directly or indirectly tied to the energy industry. That means fewer new jobs, less new construction and billions lost to the local economy.

Houston business people need to adjust their expectations for 2015 to weather what could be a tough year. The last five years have been great, but anyone who thought they were the new norm will be disappointed in 2015.