Lower Gas Prices Cast Shadow on Texas’ Economic Future
by Bob Price on December 22, 2014 at 2:05 PM
Lower gas pump prices could mean a loss of jobs and lower tax revenue for the State of Texas. The rapidly dropping gasoline prices are a result of the price of oil dropping into the $55 per barrel range. The price-point hits the range where some fracking operations become unprofitable which could cause reductions in both manpower requirements and oil production revenue to the state’s treasury.
Texas has been riding high for years on heavy oil production which stemmed from fracking which was made profitable by higher oil prices. The dropping prices could make some wells unprofitable. This could cause cutbacks in capital spending and jobs according to a report on CNNMoney. “We think Texas will, at least, have a rough 2015 ahead, and is at risk of slipping into a regional recession,” Michael Feroli, JPMorgan Chase chief U.S. economist, predicted Thursday.
Crude oil prices have dropped from over $100 per barrel in June to the current level of $54 per barrel. This is causing people to look back at the last time there was a major drop in oil prices and the resulting Texas recession of the mid-1980s. “The labor market response was severe and swift,” said Feroli, pointing to a two-percentage point jump in the state’s unemployment rate from January to March of 1986 alone.
While the impact is not predicted to be as dramatic this time around, the lower prices could still have a dramatic impact on the next legislative session where lawmakers are currently expecting to have plenty of money to spend.
The newly elected Comptroller of Public Accounts, Glenn Hegar, will be tasked with making an accurate forecast of Texas’ tax revenues. Many of these funds come from the production of oil. “The question is what will the comptroller do,” said Bill Hammond, president of the Texas Association of Business in an article by Jim Lalewitz and Aman Batheja in the Texas Tribune. “Oil is only 14 percent of our economy currently, but obviously that’s a lot of it.”
Hegar must quickly evaluate the currently falling price of oil and develop a revenue model for legislators to use in developing a budget for the next two years. Hegar is meeting with former revenue estimators including Hamilton. These people will help Hegar by providing guidance on forecasting the revenue stream for the state. “There was lots of wisdom exchanged, as well as some pretty funny and insightful anecdotes,” said Liz White, Hegar’s political director.
The Texas economy of today is much more diverse than the economy of the 1980s. However, that more diverse economy has resulted in an ever increasing population which places more demands on the state government to provide spending on infrastructure and water. Legislators had been banking on surplus oil revenues but that stream of money now seems to be in doubt.
The Tribune states, “Incoming Gov. Greg Abbott has charted an ambitious agenda for his first legislative session, including improving the state’s education system, boosting transportation funding by $4 billion a year and providing substantive tax relief.”
Abbot has set aggressive goals for building roads and improving education in Texas. Sadly, lower oil revenue could force the state’s new CEO to draw back some of those plans.
Abbott, however, remained hopeful. “At the same time, you see increased revenues in other areas,” Abbott said, according to KVUE-TV, after acknowledging state revenue will probably drop in the coming months. “You see increased sales tax revenues because people have more money in their pocket, because they’re spending less on gasoline and they can go buy more at the store. You also see an increase in manufacturing like what we see here in the Houston area.”
CNNMoney predicts the lower oil prices could also have impact on Texas’ real estate prices and banking industry. During the 1986 recession, housing prices dropped 14 percent and hundreds of banks collapsed according to JPMorgan.
“There are some reasons to think that it may not be as bad this time around, but there are even better reasons not to be complacent about the risk of a regional recession in Texas,” JPMorgan’s Michael Feroli wrote.