What a difference a few months makes. Just six months ago, oil prices were trending above $100 per barrel. Only a couple of months ago, they were around $80.
As I am writing, they are below $50. This situation is not likely to persist for an extended period as in the 1980s and 1990s; nonetheless, it is going to create disruptions and a slowing in the rate of Texas economic growth.
However, lower oil prices can benefit industries which use fuel as an input (such as trucking and airlines) and consumers. Consumers will certainly spend more given lower fuel prices, which will generate economic activity. In normal times, about 70 percent of the economy is driven by consumer outlays, and wholesale and retail trade is a huge provider of jobs. Lower prices are actually a net positive factor for the U.S. economy, but that is not the case in major producing states (such as Texas).
Oil and gas exploration and production is not a huge source of direct employment, with only about 300,000 of the 12 million people working in Texas employed directly in the sector. However, jobs in the industry tend to pay well, capital investments are large, productivity levels are high, and multipliers are significant. Reductions in activity in the industry therefore lead to relatively larger economic fallout than that observed in other sectors.
Clearly, the major oil producing regions will be affected far more negatively than other parts of the state, with notable slowing likely in the extremely rapid pace of growth in the Eagle Ford area of South Texas and the Permian Basin in West Texas and some other regions. Where the economy is more diversified, such as in the Houston area, employment losses in energy companies will likely be offset to some extent by gains in other industry groups. In other places such as Austin and parts of the Metroplex, gains will likely more than outweigh losses.
To put the situation in perspective, based on the current situation, I am projecting that oil prices will likely lead to a loss of 150,000-175,000 Texas jobs next year when all factors and multiplier effects are considered. Overall job growth in the state would be diminished, but not eliminated. Texas gained over 400,000 jobs last year, and I am estimating that the rate of growth will slow to something in the 200,000-225,000 per year range. This level is consistent with the growth the state was seeing before the recent spurt in energy activity, and is still a relatively healthy pace of expansion.
Whether we need to adjust that estimate in the months to come depends on two things: how low oil prices go and how long they stay there. The difficulty in predicting when oil prices will turn around is that a key determining factor right now is political, not economic. There is an oversupply in the market, but that alone would not cut prices in half in a matter of months as we have recently seen. There is some temporary softening in demand to accompany a surge in production as well as some exchange rate effects as the dollar strengthens, but those also would not alone bring an adjustment of this magnitude. Instead, it is the decision process by key producing nations in OPEC which will most likely lead to the turnaround in prices in the future (which, of course, impacts supply, but, more importantly, expectations).
The geopolitical issues are complicated. OPEC has multiple agendas: slowing down the shale boom in the U.S., keeping Russia in a situation that keeps natural gas flowing to the Ukraine and on to western Europe, and discouraging long-term offshore investments. The situation is very complex and has a lot of moving parts, and some of the OPEC nations have different agendas that will make it difficult to sustain the current stance.
My best estimate is that prices will not fall much more and will begin to trend upward later this year, but that is based as much on trying to surmise the likely behavior of OPEC as anything else. We are monitoring the situation carefully, and analyzing information on a continuing basis. For now, suffice it to say that prices are below the sustainable long-term equilibrium level and the consequences are notable on multiple fronts.
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.
