Magazine | March 9, 2015, Issue

Lone Star Resilience

“How do you reconcile the cognitive dissonance that a boss must stay out of a woman’s business, yet pay for it?” (B.M. Smith, @bmcsmith92)
Falling oil prices are no longer a threat to Texas

There are historical episodes, such as the siege of the Alamo, that Texans like to remember. And then there are those that we don’t. Among the latter is the 1980s. At the beginning of the decade, the state was flush with oil money, and, for the first time in its history, as rich, seemingly, as the rest of America. Richer, apparently: The OPEC embargo that had devastated the national economy during the 1970s had had the opposite effect in Texas, where soaring oil prices fueled a decade of growth and ambitious acquisition. But when oil prices collapsed, so too did the state’s newly built façade. In 1981, the price of oil hit a new record, at $37 a barrel. By 1986, it had fallen to about $10. Half of Texas’s oil and gas workers lost their jobs. More than 1,000 rigs shut down. Tax receipts plunged. The state fell into recession. And it was quickly clear that people had written a lot of checks they wouldn’t be able to cash if the oil stopped flowing. By the end of the decade, Texas had also seen a housing bust, and it led the nation in bank failures — a fact that was frequently and loudly mentioned in Congress in the debate over the savings-and-loan bailout.

Texans remember the 1980s. Those who lived through that period as adults remember it in traumatic detail. When oil prices began to slide last summer, these memories started becoming more vivid: the jobs lost, the houses foreclosed on, the friends who moved away, the peanut-butter dinners. In June 2014, crude oil was trading around $106 a barrel. By December, prices had fallen by half, and by January 2015, spot prices for West Texas Intermediate, a kind of crude oil, had dipped below $50, a sort of psychological Rubicon for millions of Texans.

National observers have helped fuel the fears by warning that the drop in oil prices will have profound implications for the state. Since the beginning of the new century, Texas has been such an outlying economic success that the state’s champions have taken to speaking of the “Texas miracle.” Since the 2000 census, the state has added about 5 million people, bringing its total population to about 27 million. Between 2004 and 2014, it added some 2 million new jobs — about 30 percent of all the net new jobs in the country. The unemployment rate has been lower than the national average every month for more than eight years. Such statistics exist in apparently endless profusion, and critics of the state’s lean-government model, or of Texas more generally, have been repeatedly frustrated in their attempts to poke holes in the story. Suspicions that the new jobs were disproportionately minimum-wage “McJobs,” for example, have been scuttled by analysis from the Dallas Fed, which found that, between 2000 and 2013, Texas created jobs in every income quartile at a greater rate than the nation as a whole.

The slide in oil prices, though, has finally given the skeptics an opening. For much of the decade, oil prices have been high, and Texas has been a direct beneficiary of them. Its outsized performance against the backdrop of a sluggish national economy was perhaps unsurprising, given that the economies of energy-producing states tend to be countercyclical. But in December, JPMorgan economist Michael Feroli warned that Texas would, “at the least, have a rough 2015 ahead,” and that it was “at risk of slipping into a regional recession.” If it does, critics can do more than enjoy the schadenfreude: They can take Texas’s travails as confirmation that the “miracle” was only a mirage.

Some are already anticipating such a conclusion. “California’s economy is improving, and its budget is finally balanced,” wrote The New Yorker’s Vauhini Vara recently. “These changes happen to come as Texas, the nation’s biggest oil-producing state by far, is grappling with a collapse in oil prices.” It was an odd comparison — Texas has a balanced-budget amendment, and California’s economy has plenty of room for improvement. The New York Times’ Paul Krugman wondered how the oil-price drop would affect major oil-producing states: “The big losers will be in the Dakotas and Nebraska, but that whole region has a population not much bigger than that of Brooklyn. The big enchilada is Texas; so how big a deal will the oil slump be there?” Plenty of Texans have been quietly asking themselves the same question, in varying degrees of panic. So let’s ask it out loud: Is the sun finally setting on the Texas miracle?

Recent history suggests that the answer is no. The trauma of the 1980s looms large in memory, but we have a more current example of what happens to Texas when oil prices fall. In June 2008, oil was trading at an all-time high of $133.88 a barrel. By December of that year, the price had collapsed by about two-thirds, to about $41 a barrel. That decline was even more dramatic than the price drop between June and December of 2014. I was a Texas-based journalist during both slumps, but I don’t remember hearing much discussion about the one in 2008. This absence of attention might have been due to the number of concurrent dramas playing out that year — the housing crisis, the Wall Street meltdown, Hurricane Ike, and the presidential election. In retrospect, we can say that the price drop didn’t have catastrophic effects; at the time, we could have predicted as much, if we had been paying more attention.

Why could we have predicted it? The simple answer is that Texas has changed over the past few decades. In 1980, the state had about 15 million people; today, it has some 27 million. The economy has grown accordingly, and diversified substantially, over that time. Back then, Texas could be summarized as oil, land, cattle, and NASA. Today, as a result of NAFTA, globalization, technological change, and limited but reasonably effective government, we have all of that plus a lot more: manufacturing, trade, medicine, finance, cybersecurity, Aggies doing cutting-edge vaccine research, and Elon Musk launching rockets in Brownsville (of all places).

In short, Texas is no longer nearly as dependent on oil and gas as it once was. In the 1980s, oil taxes accounted for about 20 percent of the state’s collections. Nowadays the figure has dropped to about 6 percent. In the 1980s, about 5 percent of Texas’s work force was in oil and gas. By the 2000s, the figure had dropped to about 2 percent. Because oil and gas production is capital-intensive rather than labor-intensive, the industry’s vicissitudes have a greater effect on output than on employment. But oil now accounts for much less of Texas’s output, too: According to analysis from the Dallas Fed, oil and gas make up about 11 percent of Texas’s GDP, compared with 18 percent in 1981.

It’s worth adding the qualification that, in 2008, oil prices rebounded relatively quickly. That may not be the case this time, as OPEC is maintaining high production levels despite the low prices. After six months of falling prices, however, Texas is hanging in there. In some ways, Texas has actually been coming out ahead so far, because cheap energy helps the rest of its economy. On January 12, the state’s new comptroller, Glenn Hegar, projected that the state will collect $110 billion in taxes and revenues available for general spending over the next two-year period, compared with about $95 billion during the previous one. The explanation is that, although oil-tax collections are dropping, they are being offset by sales-tax receipts.

Over the coming year, low prices may dampen oil and gas production, in which case Texas will see more layoffs in the industry. These will have some ripple effects throughout the economy, and the impact will be quickly felt in the parts of the state where oil predominates, such as Midland and the Eagle Ford shale formation. And if low prices persist, the effects will become broader. Nonetheless, cheap oil will continue to encourage consumer spending, and should stimulate sectors such as manufacturing. In a well-diversified economy, volatility in the energy markets does not necessarily betoken a catastrophe.

This might be particularly true of Texas. The state has gone through an oil bust before, and it’s easy to understand why the prospect of doing so again would make people nervous. But let’s not overlook the fact that avoiding a repeat of the last bust has been an implicit goal of state policy for 30 years. The reason the Texas government no longer relies so heavily on oil-tax receipts, for example, is that since 1989 the bulk of oil-tax receipts have flowed into the state’s Economic Stabilization Fund. The “rainy-day fund,” as it’s often called, was created as a sort of state piggy bank for excess revenues. Texans have obviously decided not to depend so much on oil.

The fund currently has about $7 billion in it, and the legislators who returned to Austin in January for the current session are, as usual, reluctant to make withdrawals from it. Texas is still, it seems, waiting for a rainy day, and the dropping oil prices haven’t yet amounted to one. Those who remember the 1980s, perhaps, aren’t doomed to repeat them.

– Erica Grieder, a senior editor of Texas Monthly, is the author of Big, Hot, Cheap, and Right: What America Can Learn from the Strange Genius of Texas.

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