This commentary originally appeared in the Midland Reporter-Telegram on April 6, 2015.
Recently, the average price at the pump in the Midland-Odessa area is $2.27 and statewide is $2.21 according to GasBuddy.com. These gasoline prices are down nearly 40 percent since last June leaving more money in Texans’ pockets. Contributing to these lower prices is a nearly 55 percent drop in oil prices in the past nine months.
Instead of cheering lower gasoline prices, the buzz is the decline in oil prices will lead to a 1980s-style recession and demise of the Texas model’s success.
However, a more diversified Texas economy and sound public policy framework today should silence this unwarranted noise.
The Texas economy looked much different in the 1980s.
Texas had multiple industries cropping up, but mining, which includes oil and natural gas, was dominant. At its climax in 1981, this industry was 21 percent of the private sector economy, 5 percent of the labor force, and 28 percent of state tax revenue.
After real (inflation-adjusted) oil prices slowly declined for several years, the organization of the petroleum exporting countries (OPEC) collapsed in 1986 and real oil prices plummeted 50 percent.
This shock rippled through the Texas economy as the mining industry’s share of the private sector fell to 10 percent, housing prices declined, and a banking crisis ensued. That year, total state employment declined 1.2 percent, or 90,258 jobs, leaving Midland a ghost town.
Texas’ diversification began as the medical industry expanded in Houston, retail trade blossomed in Dallas, and Austin became the Silicon Valley of the South. Even Midland found itself expanding in industries besides oil. This period of revitalization included banking reforms, increased trade volume after the North American Free Trade Agreement in 1994, and pro-growth policies helping diversify the Texas economy.
Fast-forward to 2008. The nation was in the midst of a severe recession. Real oil prices dropped by 68 percent-more than in 1986-from June 2008 to January 2009. Texas’ economy successfully withstood this dual challenge while avoiding a severe recession and annual job losses-net jobs created increased by 3,043 in 2009.
Today, the Texas model faces a similar challenge as real oil prices have declined by almost 55 percent since last June. Liberals lurk to see whether the state’s economy crashes so they can discredit fiscally conservative policies and claim robust growth was only an oil bubble.
From the 2008-09 episode and the relatively stronger-though weaknesses remain-national economy today, it is unlikely critics will get that opportunity.
As Texas diversified, the mining industry’s share of the private economy declined. The mining industry is now only 15 percent of the private economy, 2.7 percent of the labor force, and 11 percent of state tax revenue. Less dependence on the mining industry today compared with the 1980s indicates the current episode might follow more closely with 2008-09, not 1986.
However, there will be regions that will feel the drop in oil prices more than others, such as in Midland. If oil prices remain subdued for a prolonged period, overall economic output and employment may slow, but nothing like the 1980s.
The drop in oil prices has led to the state’s rig count declining by almost 45 percent from a high of 901 last November according to the Federal Reserve Bank of Dallas. Fewer rigs typically precedes job losses whereby the latest report showed 3,500 fewer net oil and gas jobs in February. Despite these losses, Texas added 7,100 net nonfarm jobs that month contributing to a seven-year low unemployment rate of 4.3 percent. Midland’s unemployment rate is even lower at 2.8 percent.
Given oil prices don’t fall further or remain depressed for an extended period, the Texas Comptroller released tax revenue estimates that provide sufficient revenue for continued state services and substantial tax relief. This would strengthen the Texas model while making the state’s economy more resilient to ever-changing oil prices.
Meanwhile, let’s watch the drop in oil prices but cheer paying lower prices at the pump.
Vance Ginn, Ph.D., is an Economist in the Center for Fiscal Policy at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. He may be reached at [email protected].