Risky business Featured

8:00pm EDT July 26, 2008

As the U.S. economy continues to struggle, certainly companies across the country must be less willing to take risks. Not necessarily. In cities, such as Houston, that are in the heart of the oil industry, there are many companies that continue to grow and expand.

“Our economy is oil-driven, so businesses are definitely expanding right now because we have so many people in the oil field tool business,” says Amy Buck, developmental officer for Wells Fargo Bank in Houston. “And in the oil-side sector of the equation, businesses are still developing their companies and moving forward, especially in the Houston market.”

Smart Business talked to Buck about the effects of the U.S. economy on the Texas economy.

Is development still strong in cities all across Texas or just in Houston?

I think we’re starting to see a slowdown in cities like Dallas and Austin as far as development goes. Austin is slowing down a little because it grew too fast. It had a big influx of people into the market from California, and once that influx slowed down, due in large part to the California economy, it slowed Austin’s growth. But if you look at the Texas numbers in business banking in Houston last year and this year, we are still going strong.

Are businesses taking the same types of risks today as they did when the economy was stronger?

It is a different process today. I think businesses are thinking their projects through much more extensively now and not taking on unnecessary risks. The typical developers that take on those projects are streamlining them back to, say, one or two projects a year as opposed to four or five that they would have taken on simultaneously a couple of years ago.

They are more cautious now and not taking on as much at the same time.

Are the same companies taking the risks or have new ones emerged?

The companies that are taking the risks are the oil companies. They’re the ones that are building and expanding their manufacturing plants. They’re also having to bring on more equipment to satisfy the increased demand. It’s similar to what we went through in the ’80s except that the people in the business today who were in the business back then are being very cautious as far as overex-tending themselves. So a drilling manufacturing company maybe 10 years ago would have financed all of the expansion for a project; today, that same company is going to put down more of its own money on the project in order to avoid putting a lot of debt on the company.

What about interest rates?

We’re seeing the rates go up, and that’s due to a tightening of the market. The suppliers and some of the smaller banks are feeling the pinch from that. They don’t want to have as much money out to an individual client. As a result, some of the bigger banks are getting an opportunity to work on some of the bigger projects. There’s a tightening of money that’s also driving up the interest rates because of the tightening of the supply chain.

Interest rates today are between 7 and 7.5 percent, and that’s not bad money. I’ve been in the banking business for 30 years and I saw 16 percent rates in the ’80s, and we haven’t gotten close to that yet. In 1978, the prime interest rate was 15 percent, so we’re not in that inflationary area, but I think rates are going up now. People want longer-term financing, which at between 6.5 and 7.5 percent is still as good as it was three or four years ago. People want that long-term fixed rate because they think we’ve hit rock bottom and that we’re going into an inflationary period.

Are we?

Yes. In the oil industry, supplies and materials for manufacturing and steel for parts has risen in cost by 40 to 60 percent, just in the last month. You’re seeing it at the gas pumps and in the grocery stores as it costs more to get the goods to market. I think the Fed will probably start turning around the interest rates some time around August. We’re at the bottom of where the cycle is going before it starts to head back up. Personally, I don’t see the price of gas going down in the next 18 months. We’re at $4 a gallon, yet, in Europe, they’re paying $12 a gallon. Americans are understandably upset with the economy, but many really don’t know the effect of where it could be.

AMY BUCK is a developmental officer for Wells Fargo Bank in Houston. Reach her at (713) 209-6548 or Amy.R.Buck@wellsfargo.com.