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.
For well over a century, the vast reserves of oil and natural gas in Texas have contributed to business activity and job creation. We recently took a close look at the overall impact of the sector on business activity across the state and found that it directly or indirectly supports about one of every six Texas jobs.
Advances in technology have reduced the cost to produce oil, contributing to the current high level of activity in truly amazing ways. Only three years ago, $70 per barrel almost shut down the industry; today, it accelerates an ongoing surge.
Things are definitely looking up in the oil and gas business, with more rigs, more jobs, and more spending. The economic benefits of this activity are rippling through the economy, and that is definitely good news. It looks like we may have turned the corner back toward expansion, though there are some signals that the recovery may face some challenges.
In some ways, 2016 was a tumultuous year. It will likely be remembered for a divisive Presidential election, but also a record high stock market. Terror attacks in several nations, but global enjoyment of the Olympic Games. For the economy, 2016 brought both continued improvement and notable changes, including long-awaited decisions from the Federal Reserve and OPEC.
Members of the Organization of Petroleum Exporting Countries (OPEC) have agreed to cut crude oil production by 1.2 million barrels per day beginning in January. Russia announced it would cooperate and lower production by 300,000 barrels per day, and there is some chance other nations representing about 20% of global production will also join in following an upcoming meeting.
On October 19, Saudi Arabia held its first international bond sale - EVER! The sale, which received orders of $67 billion for the $17.5 billion in bonds offered, is the largest to date from an emerging market economy. Investors eagerly welcomed the offering as a way to achieve further exposure in the Middle East given recent expectations that the price of oil will rebound next year. The kingdom offered dollar-denominated bonds with yields slightly higher than US Treasuries with similar maturities. In total, Saudi Arabia raised $5.5 billion of both 5- and 10-year bonds and another $6.5 billion in 30-year bonds.
While the diversified state economy continues to grow, one area that will continue to feel the pains of lower oil prices will be the State Treasury. Texas greatly benefited from the oil boom through revenue from natural gas and oil production taxes, which equal 7.5% of the market value of natural gas and 4.6% of the value of oil production in the state. Sales taxes, motor fuels taxes, and many other sources of funds tend to rise with the price and production of oil.
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.