Burgess COMMENTARY

Peter Burgess

5 Ways The Oil Collapse Just Whacked Texas' Economic Outlook

The oil price collapse initially conjures up images of struggling companies and lay-offs. But the knock-on effects on oil-centric state economies should not be overlooked.

States like Texas and North Dakota have been growing faster than the US national average thanks to high oil prices and drilling activity in unconventional oil plays like the Permian, Bakken, and Eagle Ford. We got our first indication that state officials are bracing for this all to change this week.

This week, Texas' leading financial officer downgraded his state's revenue outlook. These first round cuts are an attempt to plan for the coming slowdown in O&G, but we believe they are not nearly deep enough to reflect the full impact this downturn will deliver. Failure by forecasters to understand the depth of this coming activity crash could lead to a death by a thousand cuts for revenue estimates - this is true for both the public and private sectors.

Texas Comptroller Glenn Hegar said: 'We're all well aware that oil prices have dropped significantly in recent months. Lower oil prices will likely lead to significant slowing in oil exploration/production and has dampened our economic forecast. Recent declines in oil prices, if sustained over time, will result in slower growth in revenue collections than we have seen in recent years.'

This week's cuts are likely just the first of multiple negative revisions in the state income outlook for Texas and North Dakota over the next 12-24 months.

5 Ways Oil's Collapse Is Hurting Texas' Economic Outlook:

The O&G Sector Drives 17% Of The Texas Economy. Although the impact of the oil and natural gas industry on Texas’ economy has moderated, its current 17% share of Texas GSP remains 4 to 5 times greater than the share of oil and natural gas in the nation’s economic mix.

Direct Revenue Cut By $1bn. During 2014-2015, oil production and regulation taxes are expected to bring in $6.6bn, about 6.4% of Texas total net revenue. During 2016-2017, this figure is now forecast to fall about $1bn to $5.7bn, or 5.2%. Unfortunately, this estimate by the Comptroller is likely not enough to account for the true activity decline. The 14% projected decrease is only a fraction of the almost 60% decline in oil prices so far, and while not one-for-one, the impact will be higher than this first round estimate.

Gross State Product Growth Cut By 600bps. Texas real Gross State Product (GSP) grew at an estimated rate of 3.7% in fiscal 2014, largely due to expansion of E&P activity in the Permian and Eagle Ford. The growth in real GSP is expected to slow to an annual average of 3.1% over the next two years as lower oil prices lead to reduced activity in the oil and natural gas sector.

O&G Sector Employment Poised To Plunge. Texas' oil and natural gas sector lost 21% of its jobs from October 2008 (239,700) to October 2009 (190,100). Today, industry employment in Texas is 318,900, an increase of 25,100 (8.5%) in the past year alone. Now the Texas comptroller expects that hiring to give way to lay-offs. 'The recent fall in oil prices is expected to lead to a decrease in mining and logging employment in 2015,' Hegar says. We wouldn't be surprised to see employment cuts worse than 2008/2009 this time, potentially on the order of almost 100,000 jobs lost.

Real Estate Prices To Be Pressured. The state’s two fastest growing metropolitan areas in fiscal 2014 were Odessa and Midland, both located in the Permian Basin, and both with economies dominated by the energy industry. Commercial and residential real estate prices in these cities, as well as energy hub Houston, have benefited greatly in the past 3 years from population growth and economic success. Prices and sales in these markets are already starting to fall, which hurts homeowners and the construction industry.