Job growth in Texas is not exactly screeching to a halt, but low oil prices could start to lead to weaker employment figures.
“The Texas labor market will likely tighten further in the months ahead; however, if oil prices continue to linger around $50 per barrel, job growth in the state may begin to decelerate. Texas exports are also likely to weaken,” the Federal Reserve Bank of Dallas said in a report.
The oil and gas sector was one of the key drivers of job growth in Texas in 2018. But the crash of oil prices since October could throw sand in the gears of the Texas growth engine. The biggest question is how long the bust will last. If WTI rebounds in 2019, the impact on employment might not be that large. But the longer WTI wallows below $50, the more likely the energy sector will see layoffs.
The Dallas Fed notes that large changes in oil prices impact Texas job growth on a roughly six-month lag. So, we have not seen the impact yet. “This pattern suggests that if oil prices remain low, Texas job growth is likely to weaken during second quarter 2019,” the Dallas Fed wrote.
A few companies have already curtailed drilling plans or lowered their budgets to reflect a deteriorating pricing environment. Diamondback Energy and Parsley Energy both cut their budgets for 2019, and Centennial Resource Development abandoned plans to deploy new rigs, according to Bloomberg.
Every major price spike or meltdown raises questions about the impact of oil prices on the economy. High oil prices have historically been a drag on the U.S. economy (and other oil-consuming economies), while cheaper fuels are often likened to a stimulus or a tax cut for motorists. At the country level, price spikes have siphoned money out of the U.S., filling the coffers of oil-producing countries such as Saudi Arabia.
That relationship is not what it once was. The U.S. is now the world’s largest oil producer by a decent margin, so low oil prices are no longer a clear-cut benefit for economic growth. President Trump still seems to think so. Last month, he thanked Saudi Arabia for lowering oil prices, calling it a “big Tax Cut for American and the World.” He also said, “but let’s go lower!”
The dynamic is more complex than that. Low oil prices have a mixed economic impact, and may ultimately be a wash at the macro level. However, that obscures the reshuffling of money from within the country. Low oil prices will take dollars out of the pockets of people and companies in Texas, North Dakota, Louisiana and Oklahoma, and funnel it into the pockets of motorists on the coasts.
At the company level, oil prices are clearly negative for drilling. “We are clearly in the danger zone,” Frank Verrastro of the Center for Strategic and International Studies, told the Washington Post in November. “For U.S. producers, sustained prices below $50 would undoubtedly be problematic for all but the most efficient operators.”
Others agree. “Shale companies outside the Permian appear to face greater financial distress, and we think they would need to scale back activity more were prices to stay low,” Standard Chartered wrote in a December 19 note. The investment bank dismissed the notion that shale drillers have succeeded in dramatically lowering breakeven prices to the point that they can thrive in a sub-$50 oil environment.
Meanwhile, the recent price meltdown shows some signs of being a demand-driven phenomenon as well. The 2014-2016 price meltdown occurred at a time when the global economy did not necessarily see dramatic upheaval. Rather, prices fell by more than half because of a surge in U.S. shale production, while OPEC also declined to cut output.
To be sure, the latest crash is also, at least in part, the result of a surge in supply. U.S. shale once again defied expectations, and Saudi Arabia ramped up output in the second half of 2018 in anticipation of steep losses from Iran.
However, unlike the 2014-2016 bust, most analysts also see the fingerprints of a weakening economy on the latest crash in prices. Often, conventional wisdom dictates that high oil prices lead to slower growth. What happened in late 2018 may have been the opposite. Economic weakness drove down oil prices, not the other way around. So, low oil prices may help consumers, but that may not be enough to head off a period of weakness for the global economy.
Moreover, the lock-step movements between oil prices and the stock market is also a sign that investors see oil as very vulnerable to a slowdown. “For the time being, the stock market and the oil market will echo each other,” Ahn Yea-Ha, commodity analyst at Kiwoom Securities, told Reuters. “Global economic slowdown worries have been weighing on stock market movements, and oil prices are not free from those concerns.”
By Nick Cunningham, Oilprice.com
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