Report says Texas economy equipped to deal if oil prices collapse

BBVA Compass

As oil prices continue to fluctuate, the Texas economy is better prepared to deal with an oil price drop and many of the state's major markets, including Houston, are able to withstand moderate to severe price changes, according to a recent BBVA Compass report.

As of July, Texas ranked as the sixth largest oil producer in the world. The rapid surge in oil production relative to growth and employment, and unquestioned benefit to the recovery, raise specific questions about how susceptible the state's economy would be to a sharp drop in oil prices and if the economy is fundamentally different from the 1980s.

"Today there are striking differences with the 1980s – when Texas suffered one of the worst recessions ever – which suggest that the downside risks are relatively contained," BBVA Compass economist Boyd Nash-Stacey wrote. "For example, greater economic diversification, increased trade openness, regional and national bank financing, and absence of a real estate bubble, to name a few."

However, Texas still has exposure to the oil and gas sector, which suggests that persistently low prices, or sharp drop in prices, would create economic headwinds. For Houston, the energy capital of the US, which has the largest number of mining sector employees and is one-third of the Texas' economy, the outlook is less dire.

"While it's obvious that a decline in oil prices will negatively impact Houston's economy, our estimates suggest a moderate-to-mild impact," Nash-Stacey wrote.

He predicts that the net impact for Texas may not be as strong as in the past, as the largest metropolitan statistical areas appear less dependent on oil and gas. His analysis confirms a high level of success in the efforts that followed the 1980s crisis to increase economic diversification and reduce the probability of experiencing another devastating shock that came from falling oil prices.

"For others, our estimates suggest significant economic losses," Nash-Stacey wrote. "Specifically, metropolitan statistical areas in the central and western portion of Texas that have higher concentrations of drilling activity and are less diversified are vulnerable to oil prices shocks. For Dallas-Fort Worth, Austin, San Antonio and El Paso, the outlook is slightly more optimistic."

Despite the obvious downside to lower oil prices in Texas, his estimates also suggest that a handful of states may benefit from lower oil prices and experience a non-trivial increase in activity with measured price declines.

Led by BBVA Compass Chief Economist Nathaniel Karp, the bank's five-member research team analyzes the US economy and Federal Reserve monetary policy. For its analyses, the economists create models and forecasts for growth, inflation, monetary policy, and industries. The economic research team also follows a variety of issues that affect the Sunbelt states where BBVA Compass operates.

In addition to Karp and Nash-Stacey, the bank's economic research group includes Kim Fraser, Marcial Nava, and Shushanik Papanyan.

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