Decline of oil prices could signal greater trouble for Lone Star State

Business
Payton
Midland Mayor Patrick Payton says residents will have to adjust to the new reality.

The rapid descent of crude oil prices stopped Midland's Mayor Patrick Payton in his tracks. The biggest city in the heart of shale oil patch country could use a bit of a slowdown, but this pandemic is more than asked for.

"Crisis is an overused word, but it's a crisis of shock," Payton recently told the Northwest Arkansas Democrat-Gazette. "We have to adjust to our new reality."

So does the rest of the state. Even after decades of diversification, a large piece of Texas' economy still depends on the oil industry. 

Historically, in good times, the oil industry has helped Texas grow faster than the rest of the U.S. When oil takes a downturn though, it puts a burden on the economy. First, the oil conflict between Russia and Saudi Arabia brought prices down. The response of the market and demand during the coronavirus makes the picture much bleaker.

Texas' economic growth forecast may be further downgraded to 2% by Comerica Inc. 

"This could be dicey," Jason Schenker, president of Prestige Economics LLC in Austin, was quoted by the Democrat-Gazette as saying. "Right now, there are bumps in the road. We  could see more than bumps -- potholes."

Texas is home to more energy company headquarters than anywhere else in the world. The state is also the No. 1 crude producer in the country. As oil and gas jobs have grown, so have jobs in other sectors, including the health care and finance industries. 

In the West Texas Permian Basin, spending by oil producers is expected to drop 40% by the end of the year, according to Coras Research. Across the country, between 1,500 and 3,000 oil field service jobs will be affected in the next two months.

The low price of a barrel of oil means a money-losing game for shale producers. Many companies, including Diamondback Energy Inc., have started dropping rigs. 

It seems only a short time until job losses and bankruptcies enter the scene. Recent data shows that sales-tax revenue in Midland dropped 20% from the same time last year.

The number of leisure and hospitality jobs has grown in recent years, but with the canceling of Austin's South by Southwest and other events that attracted large groups of visitors, these jobs may be most at risk.

In 2018, Texas had the highest number of residents without health insurance in the nation. People without coverage could delay seeking medical attention when they are sick, contributing to the spread of the virus. 

Adam Kamins, an economist at Moody's Analytics, told the Democrat-Gazette that Texas could be one of the hardest-hit states if the country falls into a recession. 

"You couple this with a broader demand shock, and even secondary drivers will be hit hard, like different types of office jobs, manufacturing,"  Kamins said. "This looks like a black swan event -- a one-time shock or  multiple shocks at once that could drive the economy into recession."