Texas’ economy to slow down as oil prices continue to fall

(news) oil price graphic

The Bloomberg report showed crude oil prices at just below $50 per barrel (WTI & Brent). Consequently, United States’ gas prices have plummeted to a national average of about $2.00 per gallon, a value not seen since the early 2000s according to U.S. Energy Information Administration data (EIA). As crude oil prices continue to drop, low gas prices vary among U.S. cities with San Antonio having one of the lowest gas prices at $1.79 per gallon. Despite spending less money at the pump, Texans’ heavy pockets may be empty once more.

The United States’ increase in oil and gas production makes the country a viable candidate as an exporter of oil and natural gas. However, environmental issues and oversea competitions raise concerns for the longevity of the South Texas region’s prosperity and its surrounding areas. The Organization of the Petroleum Exporting Countries (OPEC), in response to U.S. oil and gas production, had the opportunity to cut their own production and keep their prices high, but instead kept their production steady; this — coupled with increased outputs in places like the United States — has caused global oil prices to decline.

Consequently, low oil prices have caused some Texas based companies’ drilling operations to become unprofitable. For instance, BHP Billiton Petroleum announced a planned 40 percent decrease in drilling activity for the 2015 year reducing their rig count from 26 to 16. Further, Baker Hughes plans to lay off 7,000 employees within the first quarter as oil prices continue to drop.

“Lower oil and gas prices will put pressure on firms to become more efficient. The recent drop in prices will certainly have an impact, but even at $40 per barrel some companies can still make money,” said Thomas Tunstall, research director for the UTSA Institute for Economic Development. “The key question is where will oil prices settle at and become stable again. At this point, all we can do is continue to monitor worldwide production and demand, and then see what impact it has on oil prices.”

In July 2008, Texas gas prices reached nearly $4.00 per gallon, eventually dropping to $1.71 per gallon later that year. Prices continued to fluctuate between $1.50-$3.70 per gallon from Jan. 2009 to April 2014. By May 2014, however, a steady decline in gas prices became noticeable as costs continued to drop toward their current level. Numerous factors — crude oil prices, U.S. oil and gas production and improved drilling techniques such as horizontal drilling and hydraulic fracturing — contributed to the current gas price, but a significant factor, the Eagle Ford and Permian base area activity, have generated considerable economic revenue ultimately boosting the Texas economy.

Numerous companies, such as Schlumberger, Halliburton, and Baker Hughes, have established bases in San Antonio providing jobs for local residents. The Center for Community and Business Research (CCBR) at The University of Texas at San Antonio Institute for Economic Development (UTSA-IED) estimated that the Eagle Ford Shale’s impact on the South Texas economy was $87 billion. Additionally, the Eagle Ford Shale region supported 150,000 jobs and is expected to reach 200,000 jobs through 2023. UTSA IED Research Director Dr. Thomas Tunstall cites the Eagle Ford Shale, along with the Permian Basin in West Texas and the Bakken in North Dakota, as chief contributors for the United States’ increase in oil production to 9 million barrels per day, an increase in 4 million barrels per day from 2008 levels.

“We hope that the activity in the Eagle Ford will present opportunities for communities there that were not available a few years ago,” said Tunstall. “We have encouraged community leaders to use the increased tax revenues to put infrastructure in place and public amenities that will improve quality of life for all residents. These measures will form the foundation for the ability to diversify local economies so that they will be more resilient over the long term.”

According to the Federal Reserve Bank of Dallas (FRBD), Texas’ unemployment rate is currently 4.9 percent, while the U.S. rate is 5.6, ranking Texas as 3rd in nation in job growth. However, there is concern that lower oil prices will affect Texas similar to the 1980s oil industry crash. In 1982, Texas’s combined oil and gas tax revenue was 18 percent. The 2014 combined percentage was 5.5, leaving room for a potentially less harmful impact if oil prices stay low. Further, the FRBD reported that San Antonio had a 4.2 percent job growth in 2014, and predicts Texas job growth in 2015 to moderate between 2.0-2.5 percent estimating 259,000 jobs, concluding that Texas is “likely to continue to grow but not nearly as strong as last year.”

“To this day, despite our efforts with renewables and other types of fuels, oil remains the most important commodity for the world economy,” said Dwain Rogers, UTSA Transportation and Policy Research Director. “When oil changes price, everything changes.”