This oil bust may not be so bad.

Since the first big gusher came roaring out of the ground on Spindletop Hill in Beaumont in 1901, Texas has been through its share of oil booms and busts. From the oil shocks of the 1970s, through oil price collapses in the 1980s and 1990s, the oil and gas industry’s fortunes have had an outsized impact on the overall Texas economy.

Now, with a barrel of oil trading for roughly half what it fetched last summer, the Texas oil patch is bracing for another downturn. The rig count is down 29 percent from its October peak and more cuts are expected as producers slash spending plans.

Meanwhile, the supply of unsold oil is filling up remaining storage space. U.S. crude stocks rose by almost 5 million barrels last week to reach nearly 418 million barrels, the highest level since records were first kept in 1982. That glut will continue to weigh on prices for some time.

The price plunge caps a boom that helped Texas weather the Great Recession better than many states and recover more quickly. The state’s jobless rate—currently at 4.6 percent—remained below the national average. Unlike many parts of the country, housing prices have come back and topped prerecession levels.

The boom in oil and gas production was accompanied by a sharp rise in hourly wages and employment. As of December, Midland, Texas, had the lowest jobless rate—2.1 percent—of any metro area tracked by the Bureau of Labor Statistics. That’s less than half the national average.

To be sure, the energy sector is bracing for lean times as production winds down further, especially for owners of relatively high-cost, low-volume “stripper” wells that produce just a few barrels of oil per day. Larger projects—and the jobs they produce—are also at risk of shutting down as the cost of pulling oil out of the ground exceeds the revenue it can generate.

“We expect to see a significant reduction in oil field activity in 2015,” Comerica Bank’s chief economist, Robert Dye, said in a recent report showing a drop in the bank’s index of the state’s economy. “This will lead to more layoffs in the energy sector in 2015 and reduced local demand for non-energy industries.”

But Dye and other economist believe the overall impact of this oil bust will be tempered by wider strength in the U.S. economy and a more diversified economic base at the state level.

“Texas should hold up better than it did when oil prices tumbled in the 1990s and 1980s because the state’s economy is much more diverse than it was then,” said Mark Vitner, Wells Fargo Securities senior economist, in a recent report.

The region also will benefit from the ongoing development of oil and gas reserves elsewhere in the country, as Texas companies supply goods and services needed to support that production.

“There is still a tremendous boom in petrochemical plant construction along the Gulf Coast, stretching from Houston to New Orleans,” Vitner noted. “While some projects have been postponed or shelved, most remain on track and should keep construction humming right through the current supply glut.”

Vitner figures Texas’ economy will slow to about half of last year’s growth pace, but the slowdown will be felt unevenly within the state. Houston and smaller oil towns, including Midland, Odessa, Victoria and Longview, are among the most vulnerable, but should weather the downturn better than in the past, he said.

In contrast, Dallas-Fort Worth, Austin and San Antonio will likely feel less impact from the energy bust because of a wider employment base in technology, transportation and government.

Oil tax dependence

Texas is the largest oil producer but relies on oil taxes less than some other big oil states.

But the slowdown will be felt widely as Texas governments officials at both the state and local levels face the prospect of tough budget choices as the plunge in oil prices begins to show up in the flow of tax revenues, according to a recent report from bond credit rater Moody’s Investor Services.

“The price drop is occurring while Texas considers how to spend more on schools, increase transportation funding, bolster its pensions and a political desire to cut taxes,” said Moody’s Senior Credit Officer Nicholas Samuels.

But the state budget is not as vulnerable to a drop in oil and gas production taxes as other big oil producing states. Some 80 percent of Alaska’s budget, for example, is supported by taxes on oil and gas production.

In Texas, oil and gas taxes make up about 9 percent of the state’s general fund, much less than the contribution from sales taxes, which pays for about half of state spending. Lower revenues generated by the slowdown in energy production, though, could be offset by a boost in those sales taxes if lower gasoline prices help boost consumer spending, said Moody’s.

Source: www.cnbc.com

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