One aspect of the Texas economic "miracle" that made the triumphalism of its promoters so hard to stomach was the way they glossed over one of its key drivers: the oil boom. Now that global oil prices are plummeting -- down 50% since the summer -- Texas may be facing a less than miraculous future.
That's the view of JPMorgan Chief Economist Michael Feroli, who last week took the measure of the possible impact of lower oil prices on the Texas economy and found it not good. "We think Texas will, at the least, have a rough 2015 ahead, and is at risk of slipping into a regional recession," he wrote. The consequences could be far-reaching -- job losses and a sharp pullback in home prices in big Texas cities among them.
All oil-producing states will feel the pain, including California, but as Feroli explained, Texas stands alone in its position in the industry. Over the last five years, the state's share of domestic oil production has soared to 40% from about 25%. The weight of the oil industry in the Texas economy resembles that of mid-1986, when a similar oil price collapse created a major recession in that state -- while the rest of the country reaped the economic benefit of lower spending at the pump. The same pattern is bulking large on the horizon.
The reversal of the oil-fueled Texas boom over the last few years has obvious economic and political implications. Lower oil prices not only mean less money coming into the state, but a general slowdown in drilling activity as costlier exploration methods become uneconomical and get shut down.
If Texas unemployment shoots up, as it did in the late 1980s, that's a problem for Texas Gov.
A greater danger to the state's boom-era reputation is that the receding tide may expose a lot of economic wreckage to public view. One consequence of the state's low-tax, low-service credo is that infrastructure spending has been starved, just at the moment when it's most needed. As the Texas Tribune reported last year, local roads have become so damaged by heavy oil-patch traffic that in some districts the only option has been to convert paved roads to gravel -- there's no money for repaving, despite the state's burgeoning wealth.
That shows how little pressure has been placed on the oil industry to carry its fair share of the public cost of the boom or contribute adequately to public investment. When the boom becomes a bust, there will be even less money, and you can bet that the oil industry will be pleading poverty.
Questions about who has really benefited from Texas fiscal policies will be heard more often, and the answers will be ugly. As the Institute on Taxation and Economic Policy observes, Texas has one of the most regressive tax systems in the land: its poorest 20% pay about four times as much of their average income in state taxes as the top 1%; middle-income residents pay about twice as much of their income as the wealthy. Texas makes up for its lack of a state income tax, in other words, with a passel of other levies. These hit the middle-class and the poor especially hard. By contrast, California's tax system is much more progressive. (See accompanying graphs.)
JPMorgan's Feroli and other analysts concede that a few factors may mitigate the impact of the oil price slide. Gas prices haven't declined in tandem with oil, as they did in the 1980s bust. The share of employment represented by oil and gas is lower by about 25% than it was back then. And technological improvements in extraction have lowered its cost, so the price decline may not hit drilling quite as hard as it did before.
But oil is far more important to the Texas economy than natural gas, and employment is still significant. What's more, petroleum accounted for a huge share of employment growth in Texas, far more than in other states. The ripple effects could be massive.
When neediness increases, as it inevitably will in a statewide recession with rising layoffs, the middle-class and poor will again suffer the most. They'll be searching for miracles, and they won't find them in the Texas economy.