The vaunted “Texas model” of low taxes and light regulation will be tested in coming months by low oil prices, which are threatening the state’s once-booming energy industry.
The price of a barrel of West Texas Intermediate crude has dropped roughly 50 percent since the summer. That is a boon to the vast majority of Americans, who have seen prices plunge at the gas pump.
But low prices are a problem for the parts of Texas that helped make the United States the world’s top oil producer. If prices stay low, the pain will be particularly acute for drillers in West Texas and areas around the Eagle Ford Shale, as well as refineries and related industry in the Houston area.
The threat has led some analysts to suggest that Texas, which has led the country in job creation since the 2008 financial crisis, is headed for a regional recession.
Since the official start of the Great Recession in 2007, Texas has added 1.1 million net new payroll jobs, according to the Bureau of Labor Statistics, more than half of the 2.1 million jobs created by the country as a whole. The state created 441,000 jobs last year alone, according to the Labor Department. August was the first month that the rest of the country, setting aside Texas, climbed out of the jobs hole created by the recession.
A recession led by the oil industry could undermine the claims of Texas Gov. Rick Perry and other conservatives that Texas’ red-state public policies, featuring low taxes and light government interference in business, should be adopted by other states to promote job growth and prosperity.
Perry, a possible contender for the Republican presidential nomination in 2016, told his fellow governors in a December interview with Fox News that the “Texas model is a blueprint that works and I would suggest to you how to make your citizenry happier.”
Yet JPMorgan Chase chief economist Michael Feroli warned in a research note that the state is likely to lag the rest of the country in 2015. He wrote that “we think Texas will, at the least, have a rough 2015 ahead, and is at risk of slipping into a regional recession.”
Democrats have long maintained that Texas owes its strength to luck, especially to its abundant natural resources, but also to its surplus of open space and proximity to the Mexican border. They also argue that the friendly business environment that Perry has advertised in trying to lure businesses from states such as California is not worth the trade-off of relatively meager social services.
One scenario that would buttress the case against Perry would be a replay of the 1980s regional recession. Then, an oil boom led to excess housing construction. When oil prices fell, Texas lost jobs and mortgage lenders went bankrupt, creating a banking crisis. Throughout the late ’80s, the state’s unemployment rate soared above the national level, reaching as high as 9 percent.
But Texas today is bettered prepared to survive a prolonged period of cheap oil, said Michael Plante, a senior research economist at the Federal Reserve Bank of Dallas.
Plante acknowledged that the oil price decline will slow the state’s commerce. Altogether, probably 140,000 jobs are at risk in the next year or two if oil prices stay near $50 a barrel, according to Plante’s model. That figure includes not only workers on oil rigs, but people who work in ancillary industries and in the local businesses they patronize.
“This is sort of like a headwind to Texas,” Plante explained, but it “doesn’t appear to be big enough at this point to bring job growth crashing to a halt.”
That is partly because the state is better prepared to withstand an oil price shock than it was in the 1980s. Although analysts expect oil company defaults to soar, those risks are no longer concentrated in Texas banks the way they were in the ’80s. More companies are obtaining financing through stock and junk bond markets, spreading risk among investors throughout the world.
One thing’s for sure: Texas will soon have less tax revenue from oil to fund its budget, which the state legislature will have to address.
While the 9 percent of state tax revenue that comes from the oil and gas industry will shrink, Plante said, the loss will be partially offset by greater sales tax revenue as consumers spend money they save at the pump on other goods and services.
“I think it’s true that we’re a much more diversified economy and we’re much more resilient to oil price fluctuations than we were in the 1980s,” said Vance Ginn, an economist at the Texas Public Policy Foundation. The free-market think tank has been a top promoter of the Texas model.
Ginn noted that energy production accounts for only 15 percent of the state’s output. That share has risen in recent years but is below the 20 percent that energy held in the 1980s.
Nevertheless, oil is more important to Texas than to other states. Oil and gas extraction alone, setting aside related businesses, make up nearly 11 percent of state gross domestic product, compared to just 1.7 percent for the United States as a whole.
Texas’ low-tax environment, low cost of living, and favorable tort laws have allowed it to develop industries it didn’t have before, said Ginn, citing decisions by technology companies such as Dropbox and Facebook to open offices in Austin.
