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WHEN a Texan in a big hat tells you how wonderful his home town is, reach for the salt. Bob Lanier, the former mayor of Houston, isn’t actually wearing a Stetson as he gazes from his penthouse down on a city that sprawls 25 miles away in every direction. But metaphorically he is. “Houston,” he claims, “could become one of the great cities of the world.” The remarkable thing is that he might be right.

From the time the city was founded in 1836 until the 1970s, Houston doubled in size almost every decade. Then, despite one of the deepest slumps any city had experienced since the 1930s, the metropolitan area managed to add 1m people in the 1990s to grow to 4.7m, making Houston the fourth-largest city in America.

It is already bigger than Berlin and, with a GDP of around $215 billion a year, has a larger economy than Hong Kong. Because it is the nearest metropolis to the cities of northern Mexico, it may attract another 2m people over the next two decades, which would give it almost the same size of population as London has now.

But a global city? These are few and far between. Houston can hardly dream of becoming a global financial centre like London, New York or Tokyo. But its business leaders think it could become a cosmopolitan, entrepreneurial hub—a Hong Kong, a San Francisco or even a new Los Angeles. It shares LA’s smog, its sprawl, its Latino culture, even its ugly hubris; and by some measures it surpasses LA’s ability to reinvent its economy. Can it use its adaptability to turn itself into a properly international place?

Its hopes still depend disproportionately on its most global industry. Energy accounts for half of Houston’s economy. During the 1970s, while the rest of America stagflated, Houston boomed as high oil prices sucked billions into the country’s oil capital. In that decade alone, the city built almost as much new office space as the total amount of commercial property available in San Francisco. Money was being lent and business plans formed on the assumption that oil would go to $50 a barrel. At the height of the boom, about 80% of the city’s economy was oil-related.

The bust was traumatic. By the mid-1980s, all that new office space stood empty. Every big local bank was taken over. Only one of the property developers then in business is left. Unsurprisingly, a certain paranoia lingers in the city about the oil business. The Greater Houston Partnership, the main business lobby, has spent the past 20 years frantically encouraging the city to diversify. Yet the fact is that the energy business and Houston itself have emerged stronger from the terrible bust.

As company after company was forced to cut back, they collapsed their operations back into Houston and seem unlikely to be dispersed again. In 1999, when oil slumped to $10 a barrel and the number of oil rigs in America fell to its lowest point in living memory, Houston still managed to add energy jobs.

Now another boom is in prospect, with oil prices high again. Matt Simmonds, the head of a local energy consultancy, argues that America’s past reluctance to build new power plants will force it to increase energy capacity by around 30% in the next ten or 15 years. The rig count is already 50% above last year, and natural gas exploration is soaring. If oil prices stay high (a big if) and if other countries share America’s energy worries, Houston will grow in importance.

It is hampered by a wild-catting reputation. In fact, the energy business is changing in three significant ways, and Houston is the centre of all of them.

First, technology. Not long ago, oil drills went down to 1,500 feet (457 metres). Now they go to 15,000 feet. Companies use four-dimensional computer imaging to plan new fields (time is the fourth). This is making oil an information-intensive business and puts a premium on the kinds of skills available in Houston.

Second, the cost of new oilfield exploration and development has risen so far that even newly merged behemoths cannot always finance them alone. This makes deal-making vital, which is good for the city where deals are made. If you are not attending, say, lunch at Houston’s Petroleum Club, you are out of the loop.

Third and most important, oil is now only part of a bigger energy business, which includes electricity. Once divided into self-contained regional markets run by local utilities, the electricity business is being changed by the gradual emergence of a national grid dominated by power producers and traders. Big users now decide whether to buy power at long- or short-term rates, rather as they arrange their financing. A new business of energy arbitraging is emerging, and its centre is Houston.

Three of the five new skyscrapers going up downtown have as their main tenants energy companies that did not exist ten years ago. One of them, Enron, is building a 50,000-square-foot trading floor—a single-company answer to the Chicago Board of Trade. Enron has probably been Houston’s most successful energy company of the past ten years. It has never explored for, pumped up, or refined a single drop of oil.

However well-placed Houston is to take advantage of the energy business, it will never be a great city as a one-trick pony. Its boosters point to other strengths:

• Trade. Houston is America’s second largest port, which is remarkable considering it is 50 miles from the sea.

• Computers. The city is home to Compaq, America’s third-largest PC maker. If you include Dell, based in Austin, two of America’s four big computer firms are in south-east Texas, not Silicon Valley.

• Space. The National Aeronautics and Space Administration centre is in Houston, thanks to Lyndon Johnson, a native son.

• Medicine. Houston is home to probably the largest medical complex in the world. In a moment of extraordinary optimism, the city set aside 700 acres in the middle of town for medicine. The hospitals, clinics and research centres of the Texas Medical Centre employ 55,000 people and deal with 70,000 patients a day. St Luke's has performed more heart surgery than any other hospital in the world. MD Anderson and the Texas Children's Hospital are among the top two in their respective specialities, cancer and paediatrics.

This list has holes in it. Houston has no real financial services (the mainstay of the biggest global cities) or pharmaceuticals (despite the medical centre). And some of its new industries are less robust than the boosters claim. Its port's success depends on the vagaries of Mexico's economy. Space does not employ many people and is unlikely to grow until the far-off day when the commercialisation of space arrives. The Texas Medical Centre is set up on a not-for-profit basis, so it has not been able to commercialise its activities (hence the lack of drug firms), though a new biotechnology park may help.

In fact, Houston's main hope for diversifying lies not so much in particular sectors as in something intangible: its stunning ability to create new firms. For the past three years, Houston has created more new companies than any city in America. It is almost certainly the best place either to start a business or find a first-time job. The reasons for this are the real driving forces behind its success.

The first is unmeasurable—a no-holds-barred optimism of the old school. One survey shows that about two-thirds of Americans agree with the assertion that “if you work hard in this city, eventually you will succeed.” But Houston's figure even at the bottom of the city's recession was 75%, and now it is 88%, the highest-ever, and (says the survey's author, Stephen Klineberg of Rice University) the highest of any big American city.

It may not be true that anything is possible in Houston, but people act as if it were. Bill Gilmer, the chief economist of the Houston branch of the Federal Reserve system, argues that this explains why Houston recovered so fast from the oil bust: unemployed engineers went out and set up their own firms, just as aerospace engineers did in Los Angeles when the end of the cold war put them out of business.

The second advantage is technical. Uniquely for an American metropolis, Houston has no citywide zoning ordinances. When planning decisions are made, they are made by developers on their own land. For the would-be entrepreneur, it is thus easier and cheaper to find a place to set up shop in Houston than in any other city in America.

Lack of zoning laws hands power to developers who insist that new developments be large to capture economies of scale. They expand in leapfrog fashion, ignoring small 20-acre plots near the city centre in favour of vast planned towns further out. This drives land prices sharply down, especially the further you go from the centre. On top of that, an aversion to red tape makes it easy to get building permits. Barton Smith, a land economist at the University of Houston, reckons lack of red tape is at least as important to keep costs low as lack of zoning laws.

Lack of zoning also makes neighbourhoods slightly more mixed—mixed in terms of usage (residential and commercial are more muddled up than elsewhere) and racially. Because there are no zoning laws to force, say, a bankrupt restaurant to re-open as a restaurant, areas change shape quickly. At the same time, Houston is less segregated racially than any other city, by most measures.

One should not be over-impressed by this. Whites in Houston may be more likely than their peers elsewhere to have had a conversation with someone of a different race in the previous week, but that hasn't stopped them heading for the suburbs. Much of the racial mixture downtown is of blacks, Latinos and Asians (the city has America's second-largest Vietnamese settlement after southern California). But because zoning laws do not enable local groups to keep poor people out (for example, by requiring that all housing plots be huge), Houston remains racially desegregated by American standards. This helps draw in immigrant workers, creating a pool of labour.

That leads to the third of Houston's main characteristics which should prove an advantage in the 21st century: racial tolerance. Houston looked like a southern town until the 1970s: white, with a large black minority. A generation later, its population is roughly one-third white, one-third black and (slightly over) one-third brown. Other cities have similar profiles but none went from a bi-racial to a multi-racial city quite so abruptly.

Even more strikingly, it did so peacefully. Houston has not had a race riot since 1914. For the largest southern city to have gone through the civil-rights era and its aftermath without upheaval is a remarkable comment on its politics. Minorities have long been fully or over-represented in the city council, county commissions and the Texas state legislature.

Bob Stein of Rice University argues that, unlike other growing cities, Houston is reinventing the tradition of a powerful group of civic-minded business leaders, the fate of whose companies is closely tied to that of the city. Ken Lay, Enron's chairman, is an example. He has been the driving force behind the building of two sports stadiums, and has a pet project to boost child literacy. Rumour has it that he may run for mayor.

The effect of this sort of civic-minded activism showed up in the late 1990s. At a time when America was busily abolishing affirmative-action programmes, Houston went the other way: it had a new one approved in a city-wide referendum. For better or worse, this showed how racially tolerant it is.

In many ways, Houston is thriving because it has kept alive an old-fashioned, industrial mode of growth, built on cheap land, low taxes, immigrant labour and unfettered pro-business policies. This model may not be enough in the next decades.

Houston is ugly. It was hardly charming to begin with and has pulled down many of its old buildings. It may have to pull down even more after recent floods caused $2 billion-worth of damage. It is also, as Al Gore rudely pointed out during the presidential campaign, polluted. Since cities now have to attract skilled workers with “quality of life” benefits, this is a big problem, and not one that can be overcome by cheap housing.

Business leaders are frantically trying to catch up. In an unusual example of bipartisanship, a fervently conservative property developer has joined forces with a former member of the Clinton administration to back a $500m bond issue to plant 1m trees. The Greater Houston Partnership has executed an about-turn on pollution. Having argued last year that new pollution controls damage growth, it is now on a crash course to cut ozone-creating emissions as fast as it can.

If this sudden change of mind is real, it poses a tough question about zoning. Houston has 2,300 people an acre, compared with 6,000 in Los Angeles and 20,000 in New York (at the other end of the scale). This extraordinary extensiveness is expensive. At one point in the early 1990s, Houston alone was spending more on roads than any state except California (and, of course, Texas).

There are doubts about how much further sprawl can go. Three-quarters of the best-paid jobs are still on or within the inner ring road. Some new suburbs are 50 miles away. Can the city continue to burst outwards while attracting the skilled people whose jobs are downtown? And surely that means introducing zoning?

Lastly, Houston faces a severe problem in the one area where its national reputation is high: education. To run his “number-one priority”, Mr Bush picked as secretary of education Rod Paige, a former head of the Houston independent school district. The president claimed, correctly, that Mr Paige had overseen substantial improvements in the city's education, especially among minorities. What he did not say is that these improvements have been nothing like enough.

Despite successes in individual schools, half of all Latinos fail to graduate from high school, compared with 10% of whites and 20% of blacks. Whites are abandoning Houston's public schools. They represent only 12% of pupils; 54% are Latino. More than a quarter of today's schoolchildren are likely to drop out.

In a world where a good job depends on having a college degree, this is alarming. Rice University's Mr Klineberg argues that new immigrants from Mexico arrive lagging further behind the rest of the country educationally than did the wave of immigrants in the early 1900s. The first wave took several generations to catch up. Today's immigrants will have to close a bigger gap more quickly. If they do not, they may end up in an underclass that could scratch at Houston's racial harmony.

Can Houston make it? The city has experienced the three big transformations that affect America in their purest form: the change from a raw-material economy to services; the change from a bi-racial to a multi-racial place; and the moderation of a no-holds-barred pro-business culture to take account of environmental and social costs. Elsewhere, these changes have occurred over 50 years. Houston has lived through them in 20. And the next 20 years will probably be just as dramatic and successful. Hold on to those Stetsons.