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Can't Pay For 'Texas Miracle' With Cheap Oil, Gas

Summer's sweltering temperatures are on their way to the Lone Star State, but the "Texas Miracle" -- until recently driven mainly by the state's oil/natural gas industry -- is on ice, the Austin-based Texas Taxpayers and Research Association (TTARA) said in a new report.

"The 'Texas Miracle,' as our state's nation-leading economic engine has been dubbed, is currently on ice," said TTARA President Dale Craymer, author of the report. "Much of Texas' growth has been fueled by oil and gas, and the recent price drop has taken its toll. Texas is no longer the nation's most robust job creator. Although the state continues to add jobs, for the first time in 12 years our job engine has been lagging the rest of the nation."

Thanks largely to horizontal drilling and hydraulic fracturing in unconventional plays, "the oil and gas industry is almost as big a player in the Texas economy as it has ever been -- at least before prices started dropping," TTARA said, noting an adjustment for a 1992 industrial classification change that "shrank" the industry on paper. "In 2014, the industry accounted for 13.5% of Texas' economic output -- not substantially less than 1981's 15.3% record.

"There's a great deal more to Texas than oil and gas, but when 13.5% of the state's economic output has been cut by more than half, it takes a toll on the bottom line," TTARA said in a report published Tuesday.

Texas produces more than one-third of the nation's oil output, and a price collapse like the one taking place now "is a body blow," TTARA said. "Oil and gas are five times more important to the Texas economy than they are to the nation as a whole."

In about a year's time, the Texas rig count has fallen from more than 900 to the 200s, TTARA noted (see Shale DailyMarch 24). "With each rig reflecting perhaps $75 million in annual operating costs, the loss of over 600 rigs equates to a drop in Texas investment north of $40 billion."

That means layoffs -- 65,000 jobs lost over the last year, TTARA said. Citing the U.S. Bureau of Economic Analysis, TTARA said every Texas oil/gas job supports 2.8 other state jobs. So the 65,000 loss of direct industry jobs makes for roughly 250,000 jobs lost total.

Karr Ingham, an economist following the Texas oil and gas industry who also compiles the monthly Texas Petro Index (see Daily GPIMarch 3), told NGI's Shale Daily in an email that he's familiar with Craymer's findings and mostly agrees. He said he thinks the estimate of 65,000 upstream oil and gas industry jobs lost in the current downturn is too low.

"There is little doubt about the fact that additional jobs were lost in the fourth quarter, and our estimate (The Texas Alliance of Energy Producers and me as its petroleum economist) is that about 72,500 jobs were lost through December 2015 (in other words, another 12,000 or so jobs lost in 4Q2015); and, through February we estimate the loss of about 80,600 jobs off the peak of about 306,000 in December 2014. The rate of year-over-year industry job loss was over 23% in 2015 by our estimation, and is about 22% in February 2016," Ingham said.

Despite the hefty job losses and curtailment of activity in the oil/gas patch, Texas, is not experiencing a fiscal "calamity," TTARA said. Part of this is due to about $4 billion that lawmakers left unspent in the general revenue fund last year; that's in addition to $10 billion in the state's economic stabilization fund.

Revenue is more diversified than in past years, too. Revenue to the state from oil and natural gas taxes plays a smaller role. "Severance taxes went from 24% of state revenues in 1980 to 8% by 1990, partly because of falling oil and gas prices and production, but also because the state raised other taxes, making them more important players in the state's revenue structure," TTARA said.

"Sales, fuels, franchise and other tax hikes inflated the tax base by nearly 50%, reducing the state's reliance on oil and gas taxes."

But when it comes to severance tax revenue, higher oil and natural gas production has raised the floor on revenues. Today's oil production is about 50% higher than during the industry downturn in 1986 and nearly three times higher than it was in 2008, TTARA said, adding that natural gas production is "substantially higher," too.

"That means the severance tax floor is much higher today. For example, in 1987, $30 oil on an annual basis equated to $1 billion in severance tax collections; in 2009, $500 million," TTARA said. "Given near-record production today, $30 oil would generate $1.7 billion in severance taxes. Today's high production levels lessen the revenue depth of the price crash."

Perhaps, but sneezing in the energy patch still means chills for the rest of the Texas economy.

"The conventional wisdom is that 'the Texas economy is more diversified...blah blah blah...' -- hence the state's economy will be relatively unaffected by the dramatic and lengthy contraction in the state's oil and gas industry," Ingham said. "While that is true to some extent, those who suggest that is the case are largely speaking out of both sides of their collective mouth.

"Those same people, observing the 'Texas Miracle' (defined as higher rates of post-recession economic growth and job growth than virtually all of the rest of the nation and the nation as a whole, the fact that Texas was last-in and first-out of the recession, etc.), properly gave broad credit to the dramatic expansion in the state's upstream oil and gas economy for those positive economic outcomes.

"...[H]ow in the world can that be true on the way up and not on the way down? How can dramatic expansion add to jobs and economic growth, but dramatic contraction have virtually no effect? Rubbish."

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