BBVA Compass: The Texas Economy Can Handle $70-80/bbl Crude Oil Prices

Crude oil prices have weakened considerably in recent months, generating jitters about how far they might fall, and what lower crude oil prices could do to the overall economy, particularly in energy states like Texas. However, even a protracted period with prices at current levels is unlikely to put the Texas economy in a major tailspin the way it would have in the past, according to a new report by BBVA Compass. The reason, BBVA Compass said, is that urban areas in the state, like Houston, have become more diversified than they once were, and generally depend on more than one sector of the economy for support.  

The oil and gas industry remains a vital part of the Texas economy, and worries began to surface as West Texas Intermediate (WTI) slid from over $100/bbl in June to the mid-$70s/bbl in October, about where it has remained. However, because other industries play a greater role in the state’s economy than they once did, a retreat from higher prices is less likely now than in the past to have a major effect on Texas’ economy.

That is not to suggest that Texas would be unaffected by sustained weakness in the oil and gas sector. The energy industry makes up about one-third of the overall economy in Texas, and a slowdown in the industry would therefore have an impact on the state, particularly in the central and western regions, where drilling activity is greatest, BBVA said.

Interestingly, Houston, which is considered the energy capital of the world, would be less-affected than some other parts of the state because of its generally successful efforts at diversifying its economy.

“While it’s obvious that a decline in oil prices will negatively impact Houston’s economy, our estimates suggest a moderate-to-mild impact,” Boyd Nash-Stacey, a BBVA Compass economist, said.

Although Texas is handling prices in the mid-to-upper $70s/bbl, a prolonged drop below $70/bbl would likely result in “a significant reduction in employment and wages,” according to the BBVA Compass report. If prices remain in the $70-80/bbl range, they are in the breakeven range for most companies. Only a few companies have breakeven points under $70/bbl, BBVA Compass said.

The combination of horizontal drilling and hydraulic fracturing in unconventional shale formations, such as Eagle Ford, has created an energy renaissance by allowing the United States to produce a significantly greater portion of the oil it uses. That has provided price stability, and it allowed oil-producing states like Texas to recover earlier than non-oil producing states from the recent economic recession.


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