Overheard in Austin: “The Dallas Cowboys in the playoffs and gas under two bucks a gallon. Is this the 1990s?”
That was weeks ago. Since then the Cowboys have been well and truly sent packing – and petrol prices have continued to go one way: down. At the time of writing, GasBuddy.com put the lowest petrol price available in the state at $1.55 (€1.34) per gallon.
It's obviously great news for consumers, who can now gas up their pick-ups and SUVs to their heart's content. But it's beginning to worry large sections of the oil industry here. So many small towns and cities all but taken over by oil and gas companies in recent years were promised 25 years of continued wealth and economic growth. Now, as the price of crude oil plummets, several analysts publicly contemplate the possibility of a Texas recession.
A recent JP Morgan report suggested that while the rest of the country would benefit from lower oil prices, Texas could be “headed for recession.”
Its vulnerability is based on the intense concentration of crude oil production here. More than 90 per cent of the growth in the past five years has been centred in Texas and North Dakota. So both are going to be more acutely affected by price fluctuations, and Texas more so on account of its size.
Global Prices
It’s likely global oil prices will stay low for some time to come. and Iraq is at the heart of the current price drop, according to
Michelle Michot Foss
of the Bureau of Economic Geology’s Center for Energy Economics at the University of Texas, Austin.
“Iraq has re-entered the market and, in spite of instability, continues to grow production and output,” said Foss, who is the bureau’s chief energy economist. “The assets are enormous, and of premium quality.
"Their postwar re-entry to the Opec quota system was always going to be disruptive, and so it is," she said. "They would like to reach five to six million barrels per day, have said so on numerous occasions. And, with the new government and other priorities, they have a very good chance of attaining that goal. That will leave many other Opec and non-Opec producers in the dust.
“With limited options for central banks to rescue their national economies – unless we want to see even more exciting adventures in currencies – poor fiscal management and policymaking everywhere, as well as opacity around China’s economy, oil prices have nowhere to go but down and will stay soft for the long duration.”
The current price of a barrel of west Texas crude has dropped by 50 per cent in the past six months, to its current value of $48.69.
Officials here are playing down any threat of a major downturn anytime soon. Hiring in energy should "remain steady" in 2015, according to Omar Garcia, chief executive of the South Texas Energy and Economic Roundtable. But the consensus is that US oil would need to get back up to $70 a barrel in order to maintain the boom Texans have become accustomed to.
Where next for the US
oil price? Ehud I Ronn, a
professor of finance at the University of Texas, has researched oil price to get a handle on just how low they could go.
“I see this as primarily a demand-driven phenomenon,” Ronn said. “The demand for oil has declined due to the fall off in growth in Asia and in Europe.
“I have examined whether oil prices are affecting equity prices or the other way around. It seems to me that equity prices are driving oil prices, although I recognise the importance of the geopolitical issues some people are also pointing to – that is, the big producer in the Persian gulf trying to hurt its regional competitors in the US.
“My forecast for the spot price of oil one year hence is based on prices of futures contracts as well as an assessment of the oil-price risk premium. Based on the West Texas Intermediate [the benchmark crude for North America], prices will recover to the $58 dollar range by this time next year.”
Standard & Poor’s
In December, Ireland’s favourite ratings agency, Standard and Poor’s, issued a ratings report for the US, which warned that Texas and other energy producing states will soon see a reversal of what had been an advantage until recently.
“States with a heavy dependence on exports and energy extraction now face a relatively less friendly environment,” it reported.
S&P also said that while private fixed investment in mining and oilfield machinery increased by 69 per cent between 2006 and 2013, it was likely that 2015 would see oil production firms “pulling back” on this type of investment activity.
The S&P report did provide some positive news for the Lone Star State over the long term. The constitutional reforms that Mexico recently passed open up its energy industry to outside foreign investment.
So surely Mexico’s closest neighbour will be best positioned to capitalise on this brave new market.
