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Parker Hallam

Parker Hallam

Parker Hallam is President of Crude Energy, based in Dallas, Texas.  Crude Energy is a private, independent oil and gas company specializing in working interests and royalty…

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Will Texas Survive The Downturn?

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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  • Harvey Dixon on February 18 2015 said:
    Yes, Texas will survive the downturn.

    The 1930s "Great Depression" was a lot tougher on Texas. I missed that event by many years, but was told plenty about by many who lived thru that harsh economic event.

    I have read that in the 1960s, if you were a geologist and you were being considered an optimist if you packed a bag lunch since you hoped that you might actually get to go out to the field that day.

    Texas has plenty of other sectors in its economy such as agriculture, aerospace industry ( not talking about NASA either ) and other non-energy related industries that are located in the state.

    The business landscape will of course be affected by the downturn as it always is during any downturn. Some will survive and others will not not or be bought out by the survivors.

    Each newer generation seems to have to relearn the hard lessons that the previous generations experienced.

    Those who don't know history are doomed to repeat it, according to Edmund Burke Dublin, Ireland 1729

    The end of the word is not coming for Texas at this time. Now if another person with the same behavior and outlook as the present occupant of the White House in D.C. is elected in 2016, well, that would a present a serious problem indeed for Texas and any other oil and gas producing state.
  • Jim on February 19 2015 said:
    Parker - Texas has been the land of opportunity since the early 90's, before fracking got off the ground. Check your regional population stats and use metro size. City boundary's mean little in Texas.
  • Richard Hasting on February 24 2015 said:
    There is a lot of economic activity on the shale oil front, but it isn't really profitable, it is just easy to borrow money on. Last fall, I could not find any cash flow positive shale drillers. I'm not saying that it can't be done, but that I can't find any of the eight or so that I looked at that were not growing debt year over year and EPS staying flat or declining in a rising oil market. (Through late summer 2014)
    Many of the best shale plays have such a significant decline rate that they need replacing every two or three years. That is not a good business model to borrow 20 or 30 year money on. At the end of the article, you talk about how the US will someday be free of imports. Sadly, the only way this will happen is if we cut oil usage by 6 million barrels a day. This little downturn might cause a huge domino effect in the financial markets, and most of that money came from Wall Street. Then the question becomes, "Will Wall Street survive?"

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