Will Low Oil Prices Rattle The Texas Economy?
The benchmark price of U.S. crude hovers around $85 a barrel. That’s lower than it’s been in four years and $15 below where it was a year ago. Here are a few reasons why:
- Economic growth has stalled internationally – This has slowing the demand for oil, but oil supplies are increasing thanks to the shale boom in the U.S. and the fact that OPEC – the cartel that sets prices internationally – has not cut production.
- The dollar is strong – The higher valuation of U.S. currency means that oil prices are down but –because the dollar’s also at a four-year high – the oil is still pricey, driving down demand.
- Speculators are betting on prices to drop – Weekly production of oil is expected to reach a 45-year high next year, the market’s going bearish, driving the prices down.
Dropping prices have already things shaken up in the business world. Mergers and acquisitions of oil companies are slowing because of the uncertainty. Companies in the oil-rich city of Houston are expecting to take a financial hit, and Mexico’s massive oil-hedging program has been thrown into disarray.
So could the low prices start impacting the Texas economy as a whole?
“There’s certainly reason to give pause,” says Kenneth Medlock with the Center for Energy Studies at Rice University’s Baker Institute. “Texas is definitely a ‘go as oil goes’ kind of state.”
The question, says Medlock, is “whether this is a trend that will continue in the next couple months.”“By December we might be in the 60 dollar (a barrel) range,” he says. “At which point you would probably see, at the very least, some production ventures being delayed and that would weigh on the US economy.”
The cost of fracking an oil well is different in different parts of the state. A report Tuesday from NPR’s John Burnett indicated that some drillers may already be getting worried.
“If you’re considering fracking a new well in South Texas, you’re thinking twice about it at $85 and you’re definitely not going to do it at $80 dollars a barrel for oil,” the Houston Chronicle’s Chris Tomlinson told Burnett.
Still, Rice’s Medlock is careful to point out that the sky isn’t falling, he says.
“If you look at rig counts in the Permian Basin recently, even with oil prices falling, those rig counts have been climbing,” he says.
He says it’s just that uncertainty in China, the Middle East and other places far from the Texas oilfields make it hard to say exactly how long the downward trend will continue.