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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Low Oil Prices? Texas Is Doing Just Fine

With the oil price crash now nearly two years in, there have been some obvious casualties. Dozens of oil related firms have declared bankruptcy, oil service firms have found rig counts collapsed, and thousands of jobs have been lost across the industry with many skilled employees reporting difficulty finding anything more than short-term contract work. Against this backdrop one might have expected a severe economic downturn in Texas, but instead the Lone Star State is holding up surprisingly well.

Texas’ economy has long been thought of as being oil driven, but the reality is that the state’s situation is more nuanced. While half of the publicly traded companies in Houston, for instance, are in oil and gas related sectors, the state overall has become much more diversified in its economy. Texas created 150,000 new jobs in 2015, and 185,000 new jobs over the 12 months ending in April – a period which includes the last and most severe leg of the oil price downturn. Related: Lets Stop Pretending Nuclear Power Is Commercially Viable

Overall only 2.5 percent of Texas’ employment and about 12 percent of its total output is related to natural resource extraction. These figures highlight a sometimes forgotten truth that lies at the heart of the Natural Resources Curse – while oil, natural gas, and other resources offer enormous opportunities for wealth and a lot of output for an economy, they actually create relatively few jobs. While 2.5 percent of total Texas employment amounts to a lot of jobs and those jobs do pay well, it’s clear that oil is not the labor intensive industry that the services sector is.

Houston is certainly hurting from the hammer of the oil price collapse, but Austin and Dallas are thriving with job growth rates of 4.3 percent and 4.2 percent respectively. Neither city is closely levered to oil prices, and both are seen as economic hotspots across the country. Texas’ state finances have taken a hit by a fall in the revenues received from the oil and gas industry, but with the state’s credit overall in fine condition, that is a comparatively minor issue. Related: Should Exxon Mobil Shareholders Be Worried About a Ratings Cut?

The Texas economy is the 12th largest in the world, so despite the fact that 14 percent of the state’s revenues come from oil and gas, there are still a lot of tools that are available to state leaders. In fact, compared to neighbors like Oklahoma, and smaller states like North Dakota which have developed a more significant reliance on oil in particular, Texas is doing very well. In some respects, Texas seems to resemble Norway – benefiting from its oil endowment without being dependent on it.

Texas wasn’t always so wise in this regard. During the last serious oil price downturn in the 1980’s, the state suffered much more. Since that time though, Texas has become far less dependent on O&G. Oil and gas extraction and refining is about half as important to the State today as it was in the 80’s according to some experts, largely because other sectors of Texas’ economy have grown so strongly. Related: What Do Brent Spreads Know That We Don’t

None of this makes the pain less palpable for those in the O&G industry who have lost their jobs, or could lose their jobs in the next few months. Nor is it much comfort to investors in many of the O&G stocks which are still down 50 percent or more from their pre-crash levels. The State’s condition does provide a lesson to both groups though – diversification matters.

By Michael McDonald of Oilprice.com

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Leave a comment
  • chris on May 03 2016 said:
    Really, let's revisit this article in another 6 months.
  • stexas on May 04 2016 said:
    I think this author doesn't have any idea how Texas is impacted, especially south Texas and eagle ford shale area. When he mentions bankrupts, it sounds like it is not a big deal. Right now, East Texas to Louisiana is the area that does good due to ethylene plants and refineries.

    A lot of jobless engineers, skilled people in Houston area.

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