Texas Braces for an Oil Bust
By Hilary Hylton Friday, Dec. 19, 2008
As Texans prepare for the holidays, many are thankful that the state has so far dodged the recessionary bullet. With an unemployment rate of 5.6%, well below the 6.7% national rate, the Lone Star State continues to add jobs — 230,000 for the last 12 months as of the end of October. And while sales tax receipts, a major source of revenue for state and local government, are no longer growing at double-digit rates, they were still up almost 5% in November over the same time last year. Perhaps the best holiday news for Texans, who see long distance drives as a way of life, is that gas is down to $1.35 a gallon in many parts of the state. But that happy fact may be the harbinger of tough economic times in 2009 for the Oil Patch.
The oil and gas industry accounts for almost 16% of the Texas gross domestic product, double what it was five years ago, and that means any slowdown in that sector will have a ripple effect on the state's overall economy. "There are signs of a slowdown," says Amarillo energy economist Karr Ingham said. "The jury is still out on whether it become a bust."
Oil prices began to fall in late summer, after gas topped $4 a gallon, and the drumbeat of bad economic news and the global slowdown has sent prices ever lower. "Prices got to an insane level," Texas economist M. Ray Perryman says, "but they are equally insane now." With the price of a barrel of oil hovering in the $45 range and natural gas cut in half from a high of $14 per thousand cubic feet, the domestic energy sector is now at a critical "tipping point," Perryman says. If prices dip lower, the pace of the slowdown will quicken as domestic oil and gas fields that demand expensive high-technology drilling methods will be shut, he adds.
Thanks to those high oil and gas prices earlier this year, the state of Texas raked in $363 million in oil production taxes in just the last quarter of fiscal 2008, 36% more than the same quarter a year ago, and $777 million in gas production taxes, up 55% over the same quarter a year ago. But the numbers are now beginning to tell a different tale. While natural gas production taxes are up 56% for the first quarter of fiscal 2009, oil production taxes have slipped from the 72% increase seen in fiscal 2008, to a 36% increase in the first quarter, according to the Texas State Comptroller. (The state levies a 7.5% severance tax on every barrel of oil or cubic foot of gas taken out of the ground.)
Unlike the 1980s when oil fell to eight bucks a barrel, Texas is not as dependent on its energy industry, so the state "should have more resistance to, but not immunity from, recessionary conditions," according to State Comptroller Susan Combs. When the legislature convenes for its biennial session in January, thanks in part to last year's booming oil and gas revenues, Texas will have a big surplus, only one of nine states not in the red.
But that could soon change as the economics turn dark for the energy sector. High prices bankroll high cost production and fund technology improvements that make hard-to-reach minerals accessible, while low prices mean wells with high production costs are shut in. The threshold for oil operations expansions is a price around $50 a barrel, according to the comptroller. "This constant rollercoaster [in prices] is something the industry is really getting sick of," Ingham says.
Falling prices are only the number two concern on the worry list of 21% of chief financial officers at U.S. oil and gas companies, according to a survey by BDO Seidman, an accounting and consulting firm. The number one concern of 57% of the CFOs was access to capital. While the industry is not as capital intensive as it once was, Perryman says, it is still intertwined with the health of the financial system. However, in Amarillo, where the energy sector is about 25% of the economy, the talk around the coffee shop is still dominated by the price of a barrel of oil, Ingham says. The view from Amarillo is that the economy would be much better off with "some kind of stability in the energy markets," Ingham says, "but so far no one has figured out how to do that."
AI
