Tomorrow, 38 million acres of offshore drilling areas in the Gulf of Mexico will go on sale. Drillers are clamoring for the rights, but lurking in the background is a question: What happens if oil prices keep going down?
Just months ago, everyone was trying to figure out why prices were rising so high. But recently they’ve seen a significant turn downward, and seem poised to continue their plunge. For some answers on what falling prices mean for Texas’ energy economy, KUT’s Nathan Bernier spoke with Robert Dye, an economist with Comerica Bank. He says he’s concerned about the possibility of a slump in European business activity pushing oil below $70 a barrel and forcing Texas producers to scale back activity.
Q: What’s the big story about the Texas economy that’s happening right now that maybe the media is under-reporting?
A: Well, we all have to be aware of downside risks, particularly in this world of global interconnections, and so I do remain concerned about the crisis in Europe and the spreading recession there and slower growth in Asia. That can impact Texas a couple of ways directly: one is through technology and other exports, and the other, of course, is through oil prices and energy prices in general. A weaker global economy obviously puts some downward pressure on oil prices. We’ve seen oil prices now sag into the mid-80s for West Texas Intermediate. I think that is a number that can remain consistent with ongoing vigorous activity, but if it starts to fall much below that — I think below the 70-dollar barrel range — I would get concerned the drilling activity would slow down and we would see a cooler state economy. Certainly that remains to be seen. It’s not my expectation that oil prices fall that low, but in a cooler global environment we do have to watch out for that.
Q: What would be the consequences of oil dropping below 70 dollars a barrel?
A: Well, I think we would see rig counts go down, exploration and production programs being scaled back. And we would see that the very important energy sector for the state, I think, would become much less vigorous at least in the near term.
And we’d probably see job growth in the state level out, and just a feeling of certainly less optimism, if not more pessimism, in the state if we were to see energy prices that low.
Q: So a lot of Texans may be bored by the news out of Europe, but it’s certainly not a world away from them.
A: Well, that’s right, and there’s a lot of potential in terms of downdrafts from the Eurozone. We’re watching the situation very very carefully. Greece just had its vote, and it looks like the political situation over there — at least for the time being — looks like one that’s going to allow for stability in the Eurozone, but I think it remains a dynamic situation. There’re not just economic events. These are also political events, and so they become somewhat hard to predict, and so we are watching that situation. At the same time Asia looks like its showing some cooler growth right now, so that’s an uncomfortable situation. You know for the U.S. economy to be seeing cooler growth in Europe — or a recession in Europe and cooler growth in Asia — We’ve got, I think, a good — or endogenous to the U.S. — growth story right now: with housing coming back, with construction indicators coming up, auto sales increasing, consumers feel like they can take on a little more credit to get those auto loans. But that’s not gonna last forever if those headwinds continue, especially as we get into 2013 with the fiscal issues — the so called fiscal cliff, which we could spend several hours talking about.
Kelly Connelly, and intern with StateImpact Texas, transcribed this interview. It has been edited for clarity and content.