HOUSTON — Diversification of the Houston and Texas economies over the last 30 years means they don’t risk facing the same pain of 1980s oil price shocks, even if crude oil prices continue to slide, financial services firm BBVA Compass said in a new report.
In recent years, Houston and Texas have benefited enormously from growing energy production driven largely by the advent of hydraulic fracturing and horizontal drilling.
The state has posted the third-biggest economic expansion from 2007 to 2013, compared to 30 of the world’s top economies, according to the study.
But the economic benefits of the domestic energy boom have also meant greater exposure to the effects of low energy prices. The study said the price drop today comes in an economic climate that’s fundamentally different from the one that wreaked financial havoc on the region in the 1980s.
Today, the city has a more diverse economy, access to national banking institutions and lacks a real estate bubble, the firm wrote. BBVA compass economist Boyd Nash-Stacey called the risks of falling oil prices “relatively contained.”
Though continued decline in oil prices would have a negative effect on the region’s economy, Nash-Stacey wrote, it would only be “moderate-to-mild.”
The report, in its explanation of the Houston impact, says:
While it is obvious that a decline in oil prices will negatively impact Houston’s economy,
our estimates suggests a moderate-to- mild impact. In fact, in the more severe demand-side scenario, growth is pulled 2.3 (percent points) below our baseline. In spite of losing nearly 34.9K in the mining sector jobs, home prices also remain largely unaffected by the direct impact from the mining sector.
This could be explained from the fact that large O&G companies can offset losses from drilling and exploration activities with refining, since oil prices act as a boost to this sector. In addition, as a share of employment, the mining sector only accounts for 3.5% of all employees and in fact is only 2.0 % of the total population.
But parts of western and central Texas, where drilling activity is concentrated and economies are less diverse, are vulnerable to price shocks, he wrote.
Only the Midland, Odessa and Longview metropolitan areas have more than 10 percent of their workforce employed in the mining sector.
The report goes on to say that shale plays in Texas tend to have lower break-even points than those in other parts of the country. Because of that, oil prices would have to fall below $70 for a prolonged period of time to prompt a significant drop in employment and wages in Texas. West Texas Intermediate, the U.S. crude oil benchmark price, was trading at $74.63 per barrel Wednesday morning.
Still, the state would still face hardships if prices remained low for a prolonged period.
In a worst-case scenario, if low prices are driven by falling demand for oil, the mining sector could lose 30 percent of its employment, or 90,000 employees.
More broadly, 500,000 of the 11.6 million full- and part-time workers in Texas could be out of work. That would be a milder impact than the economic hit Texas suffered in 1986.