The law of supply and demand is one of the most basic principles in economics. The premise is that when an item is scarce, but many people want it, the price of that item will rise.
Conversely, if there is a larger supply of an item than consumer demand warrants, the price will fall, which is why crude oil slipped to $41.35 a barrel last week, the lowest intraday price since March 2009.
But here is a truism that you should know. Armadillos, the official small mammal in Texas, do not recognize nor abide by the law of supply and demand. They care not a whit about it. They simply go about their business.
Last month, some brainiac in Marietta, Texas, shot at an armadillo, with the bullet righteously ricocheting off the animal’s armor and back into the shooter’s face.
Said the Tyler (Texas) Morning Telegraph in an Aug. 7 editorial: “Don’t mess with Texas armadillos.”
Not Blistering But Not Bad
Just as you should not mess with our critters, you certainly should not predict the demise of the Texas economy, even with the struggling oil and gas industry. Some have suggested as much, and they would be wrong.
The Federal Reserve Bank of Dallas forecasts 2015 job growth for Texas at 156,000 jobs. Not the blistering pace of 2014 when the state added 457,900 jobs, but not bad.
Texas has been able to mitigate the economic damage done by crude’s price decline by cutting taxes and relying on its diversified economy, according to Gov. Greg Abbott.
“While other states have been raising taxes, we cut taxes by $4 billion … and it is attracting businesses from New York, from New Jersey and across the entire country,” Abbott told CNBC last month.
“Texas leads the nation in technology exports, we have the largest medical center, not just in the United States, but in the entire world,” Abbott added, also saying that General Motors is currently investing $1.4 billion to open a new manufacturing facility in Arlington.
A Hit in Jobs and Revenue
Still, in a world awash in oil, even Texans, albeit not their armadillos, cannot escape the law of supply and demand. Upstream oil and gas companies have laid off more than 20,000 workers in the state and more job cuts are likely on the way.
And the state’s revenue will take a hit from lower oil prices, according to an April report from the Dallas Federal Reserve Bank.
“Texas, owing to size and diversification, obtains 9 percent of tax revenue from oil and gas. Oil and gas severance tax revenue in Texas totaled $4.5 billion in 2013. With the halving of oil prices, and potentially lower production, those receipts likely will significantly fall in 2015,” the report said.
Nevertheless, Texas’ exposure to the oil glut is much smaller than that of other states, as crude accounts for 80 percent of Alaska’s tax revenue and nearly 50 percent of North Dakota’s, according to the Fed report.
A Healthier Diversified Economy
If the oil bust of the 1980s taught Texas anything, it was that a diversified economy is a healthier economy. In the decade and a half after 1986, Texas’ economy grew by 118 percent, while the mining industry (which includes oil and gas) grew only 18 percent.
“The Texas strategy of avoiding burdensome taxation and regulation has attracted a variety of businesses across many industries that have diversified the state economy,” according to a recent Wall Street Journal editorial, concluding, “the resilience in Texas is proving again that limiting government is an economic growth strategy for all seasons.”
One thing is for certain, the Texas housing market is on fire, with home prices skyrocketing to an all-time high in the second quarter of 2015. I can relate because I just bought a house in Dallas, where it is a sellers’ market to my chagrin.
“The impact of lower oil prices continues to be delayed, leading to a surprisingly strong second quarter. In fact, Texas home sales are actually stronger than they were this time last year, when oil prices were nearly $100 a barrel,” said Scott Kesner, chairman of the Texas Association of Realtors. “This is further evidence of the strong and enduring demand for Texas real estate.”
Texas home sales increased 46.3 percent from first quarter 2015 and 4.7 percent year-over-year to 88,906 home sales.
The median price for Texas homes also increased, growing 8.1 percent from second quarter 2014 to $200,000, while the average price increased 9 percent year-over-year to $258,786.
OPEC, the 12-nation cartel led by Saudi Arabia, has refused to cut output in the light of lower prices and demand. In doing so, the cartel hopes to squeeze its U.S. rivals with higher production costs out of the market.
And that strategy might be working to some degree. Earnings are down for U.S. producers, forcing them to decommission more than half their rigs and sharply cut investments in exploration and production.
Houston-based oil industry recruiter Swift Worldwide Resources estimates worldwide oil field layoffs have reached 176,100 so far.
Chevron recently announced that it will cut about 1,500 positions over the course of 2015, with bulk of the job cuts will happening in Houston.
OPEC is betting on the American energy revolution, which helped create the worldwide supply glut, resulting in an industry shakeout in which many of the new smaller oil companies that are heavily dependent on leverage not surviving.
Add China, a Strong Dollar and Iran
Add to the mix China, which has been the main driver of global growth. A slowdown in that country has meant that its appetite for raw materials of all sorts, including crude oil, has been and will be curtailed.
At the same time, a strong dollar makes oil more expensive for buyers in overseas markets. The U.S. dollar has soared 7 percent so far this year against a basket of currencies. China added to the pressure on oil by devaluing its currency last week.
And then there is Iran. The country’s nuclear deal with the West could pave the way for lots of new Iranian oil to flood the market at just the wrong time.
Add all this together and you get an environment in which oil companies are postponing investments, furloughing workers and cutting other costs.
Oil consulting firm Wood Mackenzie estimates global oil and natural-gas producers have delayed $200 billion of investment in more than 45 projects following the slump in crude prices that started in late 2014, as reported by Bloomberg.
Texas Will Keep On
Still, to the surprise of many, U.S. oil output remains stubbornly high, with projections that Texas will produce more oil and gas than ever before.
Karr Ingham, an economist for the Texas Alliance of Energy Producers, told a gathering of reporters in Houston last month that crude oil production in Texas will reach an all-time high in 2015.
Ingham, author of the Texas Petro Index (TPI), projected that total oil production in 2015 will be 1.284 billion barrels, surpassing the record high of 1.263 billion barrels set in 1972.
Explaining the apparent disconnect between oil production and wellhead prices in Texas would seem to fly in the face of the law of supply and demand.
According to press reports, Ingham said crude oil prices will have to drop to a price so low that production will be curtailed and demand will rise to remove the worldwide glut.
No one knows what that price point is and how long it will take for that to happen.
One thing is for certain, the armadillos, well, they don’t give a hoot.
I’ll see you down the road.
Dean Barber is the president/CEO of Barber Business Advisors, LLC, a location advisory and economic development consulting firm. OUR NEW ADDRESS is 2736 Golfing Green Drive, Dallas, Texas 75234. Dean can be reached at email@example.com or at 972-767-9518. If you liked what you read here, invite him to speak at your next meeting.