Texas economy

Low oil prices spell trouble for Texas economy

Oil prices have hit their lowest level since oil futures trading began on the NYMEX in 1983.

DALLAS, Texas — The state of Texas has likely lost at least $1 billion in revenue since January thanks to falling oil prices, a Southern Methodist University professor told the WFAA on Monday, as contracts at oil futures for the month of May fell below $1.

This historic development and lower prices, not thanks to COVID-19, will mean layoffs, bankruptcies and great harm to the Texas economy, according to Professor Bruce Bullock of SMU.

Bullock is director of the Maguire Energy Institute within the Cox School of Business at SMU.

“We kind of went down a hill and all of a sudden it got so steep we couldn’t hold on any longer,” Bullock said.

COVID-19 has dealt a crushing blow to the oil and gas industry.

Globally, there is a massive surplus and demand is low due to the large number of countries now processing shelter-in-place orders.

“This sharp drop in demand is unprecedented,” Bullock said. “In a normal year, the global economy uses about 100 million barrels of oil per day. Right now ? This figure is less than 70 million per day.

The price of oil per barrel for May futures started hovering around $20 on Monday, then by midday was around $10 until it dropped to near -40 dollars in the afternoon.

RELATED: Oil Price Turns Negative as Demand Collapses; Wall Street drop

A negative drop has never happened before in the United States.

Oil futures trading is basically buying commercial contracts at a price set in advance for the upcoming month.

The deadline for May futures is nearing expiry and the negative drop confirmed what many in the industry already knew: most buyers have too much crude oil and nowhere to store it.

“Producers had to pay people to get rid of the oil,” Bullock said. “There were probably people who got in today who had excess storage and got a hell of a deal. Either they got it for nothing or they got paid to take it.”

What falling oil prices mean for Texans

For Texas, it could undermine the oil and gas industry. Bullock said if prices don’t get to a healthier level, layoffs and bankruptcies are almost certain.

Many of the junior oil companies will likely be taken over by larger players who weather the storm.

For a normal consumer, cheaper gas will be the most noticeable consequence.

Sounds good, but Bullock said the economy will take a hit.

“We need about $50 a barrel to be able to produce economically for Texas,” Bullock said. “It is far.”

Texas makes a ton of money from its oil and gas revenues. It is the largest oil producer in the United States.

Dale Craymer, president of the Texas Taxpayers and Research Association, estimated that the state loses $85 million a year for every $1 drop in oil prices.

Bullock estimates that Texas so far this year has lost at least $1 billion in revenue from the oil and gas industry.

That means less money for schools, highway projects and the state’s Rainy Day Fund which funds disaster relief used to limit the economic impacts of COVID-19.

Bullock said oil prices should rebound and improve as more people return to work, but guarantees are hard to come by.

Politically, the government may step in to provide assistance as it has done to small businesses and the airline industry.

“If this goes on too long, the industry might need government help,” Bullock said.

Interestingly, China stands to gain from the US oil crash.

The country where COVID-19 started imports much of its oil and will be able to buy it for next to nothing when its industries start operating again.

“Clearly it benefits them compared to so many other countries around the world,” Bullock said. “They will take advantage of this to buy at a low price.”

Learn more about WFAA:

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What to know about Governor Abbott’s orders to reopen Texas economy amid coronavirus pandemic

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