The global effort to curb the coronavirus by limiting travel, canceling events and closing schools and businesses may well prove effective, but it’s a remedy that is torpedoing the prices of a traditional food staple from the Texas economy: oil.
The price of a barrel of oil has more than halved in the past month – and fell below $21 earlier this week for the first time in 18 years – as demand dried up amid coronavirus-induced disruptions to daily life and as an ongoing production battle between Saudi Arabia and Russia keeps oil supply levels high.
West Texas Intermediate crude, the US benchmark, hit around $25 a barrel on Thursday after the Department of Energy said it would begin filling the Strategic Petroleum Reserve under a directive from President Donald Trump aimed at helping crude producers. However, it was trading at nearly $54 a barrel just four weeks ago.
Texas has a more diverse economy than it did during the infamous 1980s oil crisis, which triggered spikes in foreclosures, bankruptcies and unemployment. But recent price cuts are set to deal a further blow to the state – fueling new rounds of layoffs and bankruptcies and slashing tax revenues – at a time when many other industries are also reeling from related fears. to coronaviruses.
“Obviously cities (in Texas) that are deep into oil and gas are going to see a much bigger (direct) impact” from lower oil prices, Jason Schenker, president of Prestige Economics, told Reuters. Austin.
For others, “it’s a second- or third-order impact,” Schenker said. “You could see job losses in many different parts of the state. It’s unclear how long this will last, but it looks like it could get worse before it gets better.
About 9% of Texas’ $1.8 trillion economy in 2018 was directly attributable to oil and gas extraction, according to the most recent figures from the U.S. Bureau of Economic Analysis.
The reliance was much higher for cities in major oil-producing regions of Texas, such as Midland in the Permian Basin – the top producing region in the United States. Nearly two-thirds of the West Texas city’s $32.8 billion gross domestic product came from oil and gas extraction in 2018, the figures show.
In metro Austin, however, the oil and gas sector accounted for less than 1% of nearly $150 billion in economic output, while it accounted for just over 4% of an estimated $480 billion output. dollars in the Houston area.
But economists say those numbers don’t tell the whole story, because many Texas companies in seemingly unrelated industries — like manufacturing and financial services — count oil and gas companies among their top customers. Additionally, money earned in the Texas oil fields is invested in homes, properties, and other assets throughout the state.
“A statewide reduction in business activity coupled with a prolonged downturn in the energy sector would ripple through all parts of the state, including Austin and the Central Texas region,” said Ray Perryman, chairman of the Perryman Group, a Waco-based business corporation. research and analysis firm.
Perryman said in an email response to questions that he expects Houston, which is home to many energy-related businesses and is a major hub for the oilfield services industry, “to see substantial fallout” even if oil prices rebound relatively soon, but not to see the same impact as the Midland-Odessa area.
Meanwhile, low prices will also hit the state budget. Taxes on oil and gas production made up 8.7% of total state revenue in 2018, according to the Texas Comptroller’s Office, up from 13.1% in 1972, but still a significant portion.
“There are risks that you could see a shortfall from the state government in terms of revenue,” Schenker said. At the same time, “you could see increases in unemployment and demand for (state) services” due to job losses.
Job cuts already appear to be taking place, with the Texas Workforce Commission reporting 19,968 unemployment insurance claims for the week ending March 14, up nearly 60% from 12,585 the week comparable to a year ago.
It’s unclear how many of these job losses were triggered by low oil prices and the corresponding downturn in the energy sector, or are simply the result of the overall coronavirus-related decline in economic activity across the country. the state. But Willie Taylor, CEO of Workforce Solutions Permian Basin in Midland, said there was no doubt the oil crisis had begun to cost workers in Texas’ energy sector their jobs.
“Our offices in Odessa and Midland were just flooded on Monday and Tuesday with first-time claimants applying for unemployment benefits,” Taylor said. “It could get difficult. Hopefully it will be short-lived” if conditions return to normal soon enough.
Barring that, however, Taylor said he doesn’t expect the repercussions to be limited to workers in the Permian Basin. With much of the state’s economic activity curtailed due to the coronavirus pandemic, people across Texas could soon find themselves in the same boat, he said.
“The Permian Basin isn’t going to be alone,” Taylor said. The Texas economy is “almost at a standstill. You can expect increases (in jobless claims) in all sectors.