For several years, the economies of Texas and its metropolitan areas ranked among the strongest performing in the nation.
Though many industries contributed to the expansion, the oil surge was a key reason for this strength. Companies and communities across the state benefitted from the entire industry spectrum: drilling to headquarters operations to service companies and many more. This situation was driven by the boom in shale production which persisted for several years in a high-price environment. Now that the oil surge has ended (at least until crude prices recover), I am frequently asked about the implications for Texas going forward.
In short, the sharp decline in oil prices and resulting scaling back in the industry have had a decidedly negative (though not catastrophic) effect on the Texas economy. As I’ve noted before, on average over the next five years, I’m estimating that the Texas economy will grow at a rate about 10 percent lower than would be the case with prices in the $70-$75 per barrel range (with the pattern over the next couple of years being quite different from that found in a higher-price scenario).
While the rate of expansion represents relatively healthy performance, it is decidedly slower than it would be with higher oil prices. In 2014, for example, the state economy added 400,000 jobs, notably faster than the 280,000 per annum I am projecting through 2020. Expansion in 2015 (December to December) was about 166,000, with a similar pattern expected in 2016. Moreover, the expansion will be concentrated in the later years of the projection period.
Oil and gas exploration and production is not a major 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 much larger economic fallout than that observed in other sectors. It should be noted, however, that the current downturn has not created the economic devastation observed in the 1980s and, in fact, modest expansion has been sustained. This fact reflects such factors as (1) the increasing diversity of the state economy over the past 30 years, (2) the lower amount of leverage in the investments (which provides greater flexibility and staying power), (3) the emergence of new technology, and (4) the nature of shale wells relative to conventional wells.
How rapidly the pace of growth in the industry gains momentum depends on how low oil prices go and how long they stay there. Oil prices are below the sustainable long-term equilibrium level, and it is highly unlikely that they will stay in that range for an extended period of time. Once prices recover, drilling activity in Texas will trend upward, with faster economic growth the inevitable result. If prices turn around sooner than expected, my forecast for the Texas economy would certainly be more positive. In fact, given ongoing efficiency gains and cost reductions, a price recovery into mid-$50s per barrel is enough to engender a resurgence, and this level is easier to achieve with an open global market. Despite capital budget reductions among major producers, the market will respond quickly to price changes. High oil prices certainly gave the state (and, in particular, regions with strong energy ties) a notable economic boost, and will do so again.
Other factors influencing future growth in Texas include challenges in the areas of infrastructure and workforce readiness. Even so, the resilience of the state economy is apparent in the broad-based, if moderate, expansion now ongoing. In addition, the Lone Star State has notable advantages such as a relatively young population, favorable business climate, and strong economic development tools.
My current economic forecast calls for expansion in Texas real gross product at a 4.15 percent annual rate through 2020, representing a total gain of $347.1 billion. Almost 1.4 million net new jobs are forecast to be added over the next five years, a 2.12 percent compound annual rate of growth. Expansion in employment and output is projected to be broad based, with all major industry sectors contributing to overall gains.
Even with the challenges we’re facing, the Texas economy is likely to continue to outpace the U.S. rate of growth over a five-year span. The oil surge certainly pushed economic expansion across the state, but there are many other industries contributing to past, present, and future growth.
