With little relief from the looming high oil prices over this past year, pocketbooks across the nation have felt the effects at the gas pump and in the cost of many other things we buy. The nation has seen an 86% increase in oil prices so far this year (mid-January to mid-October). After the recent run-up to almost $100 per barrel, there has been some moderation but little expectation that a drop to even last year’s level will occur any time soon.
In general, lower oil prices stimulate economic growth and higher prices hinder economic performance. However, the effects across regions and states can be considerably different. Texas is fortunate to have an upside to the current high-oil-price environment.
Looking around the US, some states are feeling far more of a pinch than Texas. A report by the Natural Resources Defense Council ranked Mississippi, South Carolina, and Georgia as the top three states most vulnerable to fallout from high oil prices (based on each state’s vulnerability and implementations of solutions). Northern states also feel more of a squeeze from high oil prices in the form of heating costs as they move into the winter months.
In Texas, we spend an average of almost 5% of our incomes on gasoline, which places us in eleventh place on the vulnerability ranking. The state leads the nation in total petroleum consumption as well. Clearly, many industries in the state are negatively affected by high fuel prices.
There is, however, “the rest of the story.” Because of the established presence of the oil industry in Texas, higher oil prices are not the grim circumstance they are in states without production and refining capacity. In contrast, the Texas economy benefits from increased activity in the energy sector, which lessens the detrimental effects of high oil prices to other parts of the economy.
The Texas economy has been tied to oil prices since the 1880s, and especially after the “Spindletop” gusher more than a century ago. Historically, the Lone Star State actually faced economic losses with low oil prices and economic benefits with high oil prices. The price of oil had a tremendous impact on the economy in the 1970s and early 1980s when Texas’ economy quickly expanded adding both employment and income growth as the national outlook sputtered. (The “Energy Crisis” in the rest of the US was an “Oil Boom” in Texas.)
The Texas economy is now far more diversified than it was 20 years ago, but oil continues to play a large role. A study by the Federal Reserve Bank of Dallas found that while our economy has become less sensitive to oil price fluctuations, it still responds favorably overall to higher energy prices. I have been modeling the Lone Star State almost 30 years and have consistently found a similar phenomenon even though we have changed from a sizable exporter to a sizable importer of petroleum.
We aren’t the only state to benefit from high oil prices. Trends reveal that unemployment rates in coastal Gulf States such as Louisiana, Mississippi, and Alabama decrease in response to increases in oil prices. Personal income also tends to rise with oil prices.
While the size of Texas and its diversified economy have dampened these effects, they remain and represent a silver lining in the face of rising oil prices. The energy sector is still alive and well.
Texas remains the top oil and gas producer in the nation (excluding production from federally administered offshore areas), accounting for almost 21% of national crude oil production. The state has more than one-fourth of the US oil refining capacity and almost one-fourth of the total US oil reserves.
While not the oil boom of the 1970s and 1980s, the production increase has led to a slowing of the inevitable geological decline of production throughout the state and added to the state’s economy. Record high oil prices have initiated exploration and drilling particularly in the Permian Basin area and the Barnett Shale region in North Texas, and the energy services industry is seeing job creation at levels not seen in decades. The Texas rotary rig count equaled 692 in fiscal 2006, a height not seen since 1985. In recent weeks, the total has topped 850. In addition, mining employment increased 6% last year.
Furthermore, while oil and gas related industries account for less than 3% of total employment in Texas, they are high-wage, high-productivity jobs that represent a much larger fraction of output. Energy remains an important industry, particularly in areas such as the Permian Basin and Gulf Coast.
Texas and other states with a significant oil industry presence receive some economic benefits from high oil prices. While these benefits may not outweigh the costs of such a rapid upward trend in prices for the typical consumer, they certainly lessen the blow to the overall economy.