Will Texas Survive The Downturn?

Here are some staggering statistics: Texas alone produces about 20-percent of all oil and gas in the United States. The sum-total of Lone Star oil and gas produced in 2014 topped $100 Billion, according to the Energy Information Administration. That’s up from about $40 Billion in 2007, and had a substantial economic impact statewide.

Last year there were 12.5 million employed workers in the state, which added 458,000 new jobs in 2014 alone according to the Texas Workforce Commission. During the census period of 2000-2010, Texas swelled by 4.3 million residents. Collectively, the state’s output in 2014 topped $1.5 trillion, second only to California and for thirteen years in a row, Texas led the nation in net exports at $290 billion last year.

Therefore, when both Forbes and the Wall Street Journal tackle the same topic, it is certainly worth exploring: How will Texas fare amidst lower oil prices? Forbes contributor John Kotkin opined that over the last decade, Texas emerged as America’s new land of opportunity….America’s America (for the reasons aforementioned). The obvious 900-pound gorilla in the room, then, is how much will the drop in prices affect the state’s jobs, revenue base and overall economy? Related: Can Technology Save Fracking?

Through a number of sources mostly related to oil and gas, the state government’s “rainy day fund” swelled from totally empty following the 2008 recession to a surplus of over $2 billion in 2014, mostly due to fracking and the shale oil revolution. Investment in oil and gas in the Barnett shale, the Permian Basin, the Eagle Ford shale and in other recoverable formations spackled around the state was the main reason. Like North Dakota, many remote Texas locales became overnight boomtowns.

Of particular interest, analogous to what happened in the 1980’s, is the banking sector. With hundreds of millions of dollars in loans to various elements of the energy industry, the concern now is whether this dip lasts long enough to cause wide-spread bank problems should producers, suppliers and support industry businesses default on those loans. That was a big part of what knocked the Savings and Loan industry to its knees in the 80s.

Houston is obviously heavily reliant on a healthy oil and gas industry for its primary well-being. Realtors now say the market has shifted to favoring buyers over sellers, and although still robust, houses are not moving as quickly as they did in 2014. Other areas such as construction, manufacturing, and exports would obviously also be affected if lower prices are protracted.

San Antonio is the state’s second largest city by sheer population, and has certainly benefitted to some degree by the development of the Eagle Ford shale, which lies south of the city. Along the southern tier, all the major drilling and supply companies have major hubs. Dallas and Ft. Worth, with a combined population slightly below Houston’s, are now better insulated from a single-sector decline, having learned valuable lessons from the 80s, when the city was more heavily coupled to energy. Austin appears to be giving California a run for its money as a tech-hub, and has been amply rewarded with huge population expansion, a multi-decade long real estate boom and a solid tech-based economy. Related: Why We Won’t See An Oil Price Rebound Yet

One final question is how long is this going to last? It seems thus far, most companies are weathering the storm. Certainly, revenue is down across the board. Rigs are retiring faster than anyone expected (off another 98 the week ending February 13, 2015) and companies are shoring up expenses at an equally rapid rate.

There were painful but powerful lessons learned in the 1980s, when America endured years of unprofitable crude prices and thus became totally reliant on foreign oil. This time, the dynamics are different. Shale wells have a unique personality, and will decline faster than the conventional wells of 3 decades ago.

The US has smelled the air of energy freedom and the oil and gas industry is doing everything it possibly can to make shale wells profitable at lower prices. Producers understand the vastness of the resources – both oil and natural gas – and America is ready to stand on its own two feet again, free from the oppression of relying on foreign oil.

By Parker Hallam for Oilprice.com

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