Coronavirus hit the global markets this week, sending stocks reeling and pushing economies toward possible recession. In Texas, the view could be even bleaker thanks to plummeting oil prices. Analysts say the state can expect layoffs, bankruptcies and state revenue shortfalls in the months ahead if prices remain low.
“As you watch the price of oil fluctuate, it basically is a measure of the state’s fiscal health,” Dale Craymer, president of the Texas Taxpayers and Research Association, said.
Craymer said the state loses around $85 million of revenue for every $1 lower a barrel of oil stays over a year.
This week, oil is trading around $20 lower than revenue estimates predicted. That could mean a massive reduction in expected revenue – though the state does have some savings, like its multibillion-dollar “rainy day fund,” to fall back on.
“There are a couple of things that add up to give us a pretty good cushion,” Craymer said. “But we’re moving ahead into uncharted territory.”
The territory is uncharted, in part, because of how the crash came about.
It started last week when Russia and Saudi Arabia decided to open the spigot on oil production. The prospect of cheap oil flooding the market slashed the value of a barrel by more than 20%.
Oil prices had already been dropping before those two countries opted to increase crude supply. The spread of the coronavirus had greatly reduced demand.
“It’s a really unprecedented event,” Jim Krane, a fellow for energy studies at Rice University's Baker Institute, said. “You’ve got the market under pressure from both sides. We just don’t have a playbook for this one.”
The lack of a playbook hasn’t stopped industry representatives from looking for one. So far, the closest thing they’ve found is the last big oil crash in 2014.
Like the current crash, that downturn was sparked by a decision from international producers to flood the market. In Texas, industry responded by slashing costs. Companies laid off thousands of workers and adopted new technologies that allowed them to produce oil more cheaply.
“In 2014, there was a substantial decline in market prices, but through technology and innovation the industry was able to overcome,” Todd Staples, president of the Texas Oil and Gas Association, said in a prepared statement responding to this week’s crash.
But there is serious doubt that the industry can use the same approach again.
“The industry is a lot leaner and fitter than back in 2014,” said Ed Crooks, who analyzes energy in the Americas for the Wood Mackenzie consultancy firm. “There’s a lot less fat there available to be cut.”
Crooks said jobs are a good example of how this crash is different from the last one. Over the past couple years, U.S. oil production has increased by about 30%. But, he points out, employment has remained flat. In fact, the number of people employed in oil and gas is still about 15% lower than it was before the 2014 bust.
“It’s going to be harder to squeeze a lot more out of the workforce in terms of improved productivity,” Crooks said.
Put another way: It’s harder to lay off people when your company is already running on a skeleton staff.
A final problem for Texas oil companies is that some of them appeared to be in financial trouble long before the current downturn. Many had financed the boom in oil production with infusions of money from investors and banks. The money got oil from the ground, but it didn’t always deliver good returns.
The drop in prices will make it even harder to pay it back.
“We have over $200 billion in debt that is maturing in over the next four years,” said Ed Longanecker, president of the Texas Independent Producers and Royalty Owners Association. “So there are a number of cash-constrained operators that may be impacted more significantly” from the downturn.
Depending on how long the downturn lasts, that could mean bankruptcies, layoffs and consolidations.
“We believe we will emerge even stronger," Longanecker said. “But it may be a very painful process, and the industry may look very different than it does today.”
If the worst comes to pass for the industry, Texas’ traditional oil centers like Houston and Midland-Odessa will be the hardest hit. But they won’t be the only ones, Craymer said.
“Even though you might be in Austin [and] there might not be a drilling rig in sight," he said, "the ripple effects of a downturn are certainly going to be felt here.”
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