Oil prices are touching an altitude not seen since the spike in summer 2008, pushing gasoline prices into uncharted territory and raising other costs in their wake. The situation in Ukraine and efforts by financial markets to predict it are driving the immediate spurt in prices, but even before Russia invaded, prices were trending upward as the global economy rebounded from COVID-19 and demand rose faster than supply.
As we turn the page to a new year, I am relieved to say that from an economic perspective, things are definitely looking up. There are clearly challenges ahead, but this year should bring improvement in significant ways. Let's take a quick look at progress made and obstacles faced in 2021.
Oil prices have regularly closed above $80 per barrel of late, something that hadn't happened since 2014. They've more than doubled in the past year and are a far cry from the doldrums of last spring. High oil prices ripple through the economy. More than half of the cost of gasoline is directly determined by oil prices, and most manufacturing and distribution involves some use of derivative fuels. Consumers are paying higher prices both directly at the pump and indirectly through other products.
The energy sector remains a key driver of the Texas economy. It dominates state exports; drilling, production, transportation, and processing activity involve substantial investments; and the massive supply chain has been entrenched and expanding for over a century. Although the Texas economy is diverse and multifaceted, oil and gas and related activity from exploration through shipping comprise about 13-14% of overall business activity.
Among the myriad industries affected by the COVID-19 pandemic is one particularly critical to Texas: oil! As much of the global economy shut down to slow the spread of the virus this spring, fuel demand plummeted. Prices plunged, with futures contracts even briefly going negative. The industry initiated a rapid shutdown of drilling activity, which rippled through an enormous supply chain and supporting retail and service enterprises in the affected communities and the entire state. Many service firms and large swaths of production and reserves changed hands, as capital resources for small and mid-sized firms became virtually nonexistent.
Earlier this month, oil facilities in Saudi Arabia were attacked, knocking a large portion of production (about 5% of the world's daily supply) offline. However, rather than a market-roiling, global crisis, the result was a modest increase in oil prices. A decade or so ago, the scenario would have been totally different and, back in 1973, a smaller reduction precipitated an eight-year "energy crisis," complete with gasoline lines, oil export bans, 55-mile-per-hour speed limits, turning our thermostats down, and daylight savings time. The reason? The recent revolution in US oil production and, in particular, the surge now going on in the Permian Basin, where about two-thirds of incremental domestic output is occurring.
We estimate that the Texas oil and gas business and related industries generate nearly two million jobs around Texas when multiplier effects are considered (as described in a recent column). The energy sector includes oil and natural gas exploration and drilling, as well as the industries required to produce, transport, transform, and deliver it to markets throughout the world.
The Texas economy has added 190,600 jobs over the past year, and employment has risen in 16 of the past 17 months. Last month, nine of the 11 industry groups tracked by the Texas Workforce Commission added jobs. All of this occurred despite the end (at least for now) of a major oil surge.