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Raub Report February 2015

February 24, 2015

Texans are a little nervous these days.  Some of us saw a really, really scary movie in the 1980’s, and we didn’t like the ending.  Will this be the sequel, with the same bad ending for the Lone Star State?

Nope. It really is different this time around.  A few may remember that in 1986 oil dropped to $10 a barrel (yes, it can get that low) and kicked off a real live Depression in Texas, precipitating the Savings & Loan crisis, ending the massive overbuilding in the 1980’s, banks going bust, people moving out of state, and the slogan “Don’t mess with Texas” had a meaning different than don’t litter.  Why are things different now?  Will this hurt much?

Today, Texas is vastly more diversified away from the oil and gas dependence of that bygone era.  Some statistics:  The Dallas Morning News reports that, “In 1982, taxes on oil and gas production accounted for almost 18 percent of state revenue.  Last year, the share was 5.5 percent.”   Last year the state collected $5.8 billion from oil and natural gas production, nearly 150% more than 30 years ago, yet it is a smaller portion of the state’s overall revenue.  This clearly illustrates that all of the economic development initiatives of the past 30 years have recruited a wide range of employers and expanded the sales tax base to span more business services and consumer items.

But, there will be job losses: The Dallas Federal Reserve projects 140,000 losses in the energy sector state wide. But we have 9 million jobs in Texas not related to energy.  Houston was projected to grow 3.5% this year, before the bust; now, it is lowered to 2.5%; still pretty healthy.   Job losses in the Eagle Ford will impact the many brand new motel owners, but, the bright side is these hard working folks will come back to San Antonio go to work in construction and home building, companies begging for workers.   The state comptroller projects growth for the state at 3%, down from 3.7%; still pretty good.

The state’s Rainy Day Fund has grown to $8.5-billion, and the comptroller projects it will continue to grow to $11-billion over the next two years.   It will take years for the oil and gas taxes to get back to 2014 levels, however, the comptroller projects that by 2017 Texas’ total tax collections will still be 10% higher and economic growth will exceed last year’s rate.

Another side effect: home builders based in Houston are pulling back sharply on new lot purchases but they are redeploying capital from that overheated market to more stable San Antonio and Austin areas.

Some oil companies are going to focus on the “liquids” sections of the Eagle Ford, which is more economical to drill than other fields, like the Permian Basin.  Then, also, each Eagle Ford drilling pad supports multiple horizontal wells, as many as 5 or 6, versus the traditional vertical well which can only support one well.  So, the actual cost of horizontal fracking is lower than other types, and that infrastructure is already in place.  Take-Away: the big drop in oil prices will affect our economy, but we have built a more robust state economic structure that will easily weather this storm and continue on stronger than before.