Last year, readers may recall, there was a fair amount of anxiety among Texans, and a fair amount of gloomy prophesying about Texas, as a result of a plunge in oil prices that had left the price per barrel hovering around $50. The figure was, apparently, a psychological rubicon for many Texans who lived through the bust of the 1980s, and a harbinger of doom for pundits who remember Texas’s economy as it was at that time: resource-driven and countercyclical.
I made the case for calm at that point, and the state’s economy has, as predicted, weathered the storm tolerably well over the past eight months. Today, though, oil prices have slid a bit further; on Friday they dipped below $40 a barrel for the first time since 2009. And the energy industry doesn’t exist in a vacuum. So I’d like to offer an update. I continue to think that Texans shouldn’t panic, but in light of intervening events, I would say that we shouldn’t underreact, either. Here’s how I saw it in December 2014:
Oil prices have measurable effects on the state’s revenue streams, its employment numbers, and its overall output. But in all three of those areas, Texas is less vulnerable than it once was and less vulnerable than one might think.
My main concern, at this point, is that politics (like energy markets) are affected by beliefs and expectations as much as events. With the 84th regular session set to begin in a few weeks, the last thing we need is panic in the ranks. Conversely, if the price drop prompts thoughtful reflection, that would be good. So here’s the case for calm.
It continues to be the case that Texas is less directly vulnerable to an oil bust than it was in the 1980s. The bulk of the state’s oil production tax receipts flow into the state’s Rainy Day Fund, which had about $8.5 billion in reserves at the beginning of the year. The remainder of the oil tax receipts, which flow into general revenue, work out to about 3 percent of the state’s biennial collections. And since the oil and gas industry is capital-intensive rather than labor-intensive, the state-level effects of mass layoffs in the industry would inevitably be dwarfed by Texas’s total employment number. The state writ large is more vulnerable to oil (and gas) production levels than prices per se, and production has continued apace. (For reasons I laid out briefly in the December post, oil production levels aren’t necessarily directly correlated with oil prices. And not entirely unsurprisingly, the drop in prices over the past year helped lower “finding costs” in some cases, thereby goosing some companies into expanded activity.)
On balance, then: we shouldn’t minimize the localized distress of layoffs in the industry, or be cavalier about the fact that low prices will have a measurable effect on revenue projections. At the same time, Texans should keep in mind that as a result of the growth and diversification in our state economy, and precautionary measures pursued by Texas’s leaders at that time, we’re much less exposed to the vicissitudes of the oil bidness than we once were. The state’s economic indicators bear that out: according to the Dallas Fed’s most recent economic update, the state’s economy expanded at a 1.8% annual rate in June, and the state added some 18,000 jobs that month alone.
At the same time, I’m nonetheless raising the oil price anxiety forecast from “keep calm and drill on” to “mild consternation” because the thoughtful reflection I was hoping to see in December largely failed to materialize.
The new comptroller, Glenn Hegar, has proven to be abundantly well-qualified for the job, beginning in January, when he laid out his Biennial Revenue Estimate along with an expert assessment of the state’s economic outlook; Hegar’s analysis was highly credible in part because he resisted the temptation to minimize the inherent uncertainty of global economic conditions, and the impact that inevitably has on a comptroller trying to make projections about revenue collections two and a half years into the future. And a number of elected officials, from both parties, helped keep the wheels on the wagon by the end of the 84th Legislature.
The fact that they had to do so, however, makes it impossible for Texans to be sanguine. Since Donald Trump remains the frontrunner for the Republican presidential nomination, and is the top choice of Texas Republicans also, I don’t need to belabor the point that far too many grown adults, in the state and around the nation, are behaving like toddlers who missed their naptime. (And in addition to everything else, if you’ve read this far, you probably understand the oil industry better than Trump, who said last week that he thinks the Keystone XL pipeline would create “lots of jobs.”) What’s more shocking to me is that in March of this year, Lieutenant Governor Dan Patrick held a press conference announcing his plans to subvert the state’s constitutional spending cap, in order to spend all the money Hegar had projected that the state would collect: “There is no support for exceeding the spending cap but that also means that when we leave, we will have approximately $4.5 to $5 billion in the state’s checking account.”
The spending cap is of course one of the aforementioned precautionary measures pursued by prior Texans. Had Patrick succeeded in sneaking around it a severe shortfall would have been more or less guaranteed in 2017. Setting everything else aside, a working premise of the revenue projection was that that oil prices would remain at about $60 a barrel, not $40. Even if Texas doesn’t rely that heavily on oil taxes for general spending, the difference will be noticeable, and we should all be thankful that the contingency was averted.
And again, per the Dallas Fed’s most recent economic outlook: Housing starts are down. Exports are down. Rig counts are down. Manufacturing output is contracting. Texas has proven resilient thus far. Continued complacency, however, puts that at risk. The state government has a marginal role in global energy markets these days, and a rightfully limited role even in our own private sector. But it is responsible for core services such as transportation infrastructure, which received less attention this session than locally levied taxes, the “godless socialism” otherwise known as preschool, and marginal interpretations of the Second Amendment. There’s no need to overreact just because oil is below $40 per barrel. But let’s not underreact either.
(image via Flickr Creative Commons/Paul Lowry)