Economy Pinched by Mideast Glut : Texas’ New Goal: a Shift From Big Oil to High Tech

The bloom is off the yellow rose of Texas.

For decades Texas was synonymous with high rolling, high living and going for broke; it was the state that thrived on “dinosaur wine,” a loving nickname for oil squeezed from the earth; a place where millions were made overnight, where it seemed the fast track would never end.

And in the late 1970s and early 1980s, all of the economic news here tended to reenforce that image. The entrepreneurs believed that the price of oil would break the $40-a-barrel barrier and keep on going. Houston, the Texas oil capital, was in a euphoric frenzy, and glass and steel office buildings popped up everywhere to accommodate the boom.

Jobs were so plentiful it seemed at times that convoys were descending from the North to fill them. Thanks to taxes on oil and natural gas production, state government had more money than it knew what do with, and the Legislature spent it in Texas-size chunks.

Once, in 1979, two legislators suggested putting aside some of the state’s vast oil revenues for a time when fortunes might not be so bright. Their fellow lawmakers greeted the proposal with laughter.

But that laughter and the heady days are gone, done in by the world economy and an oil glut precipitated in the far-off Middle East. The shining office buildings must now scramble for customers. Houston has 30 million square feet of unoccupied floor space--10 million square feet more than the total commercial footage in San Diego County.

To lure tenants, some buildings now are offering two years of free rent on a five-year lease. The bust has brought a quick exit of those who swarmed in to make their fortune, and, as a result, an estimated 40,000 homes are now for sale in the Houston area alone.

Although it is much less evident in cities like Dallas and San Antonio, the economic pinch is being felt across most of the state. Agriculture, Texas’ second-largest industry, is ailing here as it is in much of the rest of the country. Towns along the Mexican border have been ravaged by the devaluation of the peso. The petrochemical industry to the east of Houston, in what is known as the Golden Triangle, is in serious difficulty because its fortunes are directly related to the oil market.

Legendary Millionaires

Legendary Texas millionaires such as Clint Murchison, the former owner of the Dallas Cowboys, as well as the Hunt brothers, who once tried to corner the silver market, are in financial disarray.

In short, Texas, where all things were possible with a little gumption and grit, is now being forced to return to the real world of finite goals. Those who run this state say it must attract a wide array of industry if it is to rise above the stagnation of the oil industry, which has always been the primary source of income. The goal now is to shift from big oil to high tech, to create the Lone Star equivalent of California’s Silicon Valley.

Nowhere is the need for new economic alternatives clearer than here in Austin, where the state Legislature must somehow trim close to $1 billion in expenditures to come up with the balanced budget that is required by state law.

A Domino Effect

That prospect is having something of a domino effect that reaches down the line.

In this state, which has claimed to have the lowest tuition of any in the country, higher education offers an example. The search for distinguished teachers needed to enhance the growing reputation of the state’s university system has been slowed, primarily because top-name educators are wary of coming to a place where budget slashes are a likely prospect. That, in turn, has caused concern in the high-tech community already here, because of the close relationship between university brain trusts and the industry.

Meanwhile, the pressure for tuition increases is mounting, and one estimate is that the Legislature may have to increase it threefold.

There are other worries. State employees face the possibility of going without pay raises for the next two years. College campuses may see no construction projects except those already approved. The Legislature’s problems are complicated by federal court-ordered improvements in the prison and mental health systems, which, combined, could cost in excess of $1 billion.

Income Tax Possible

And beyond the budget battle is a prospect more alarming yet to most Texans--talk, however hushed, that the day may be coming when the state will have to impose an income tax.

Of the 10 most populous states in the country, Texas alone does not tax either personal or corporate income. To finance such projects as the state’s extensive system of highways, it has depended primarily on a basic 4.125% sales tax and the oil and gas production revenues.

“We’ve lived under the impression that the cost of growth is free,” said Victor Arnold, the director of the University of Texas Bureau of Business Research, who also said that the state, of necessity, has been forced to take a more sobering view of itself. “We have lost some of the exuberance of youth.”

Horse Racing Defeated

State Rep. Stan Schlueder, the chairman of the state House Ways and Means Committee, was riffling through a set of papers in his office. It had been a big day in the House, which had resoundingly defeated a bill that would have legalized horse racing in Texas. The proponents of the bill had argued that legalizing racing would bring money into the state’s coffers at a time when it was most needed. But the conservative Texas legislators had nixed it anyway.

Schlueder was talking about the time he was first elected in 1976, and how the state then had a $5-billion surplus. At the previous Legislature’s last session two years ago, that surplus had been reduced to $1.6 billion. And now, for the first time since the oil boom began, there is a shortfall. He pointed out that the budget has doubled since 1977, while the population has grown 26%.

“So we’ve been spending a lot of money,” he said. “This is the session of reflection. We have been riding on the back of energy since the state has been in existence. We have been trying to warn that it is not going to last forever. We’re going to have to find some alternative source of income quickly.”

Schlueder, like a number of other Texas leaders, adopts a slightly disdainful tone when talking about the Organization of Petroleum Exporting Countries (OPEC), now that the market is flooded with oil and the price per barrel continues to drop.

While the oil surplus means that Texans are paying less than $1 a gallon at the pump for gasoline, Schlueder estimates that, more importantly, the state is losing $70 million in total revenues for each $1 reduction in the price of a barrel of oil.

“There is such a glut and they are all cheating so much,” he said of OPEC. “You can’t get a handle on it.”

Jared Hazleton, the president of the privately funded Texas Research League, put it another way.

“All this may mean that what was unique about Texas may be going a little by the boards,” he said. “The base of prosperity we had in the ‘70s was an unreal prosperity that was due to OPEC. We benefited from that hayride. Texas was benefiting from something over which it had no control. Now we have to understand that day is gone and the future is going to be decided on how we react to it.”

Despite the new reality here induced by the need for budget cuts and the sagging oil market, Texas is not a state to be pitied. Texas Comptroller Bob Bullock expects overall employment to increase this year, keeping the state’s unemployment rate down to 6.1%.

The corridor between Dallas and San Antonio, which includes Austin, is booming with new light industries and service industries as the economy continues to diversify to make up for lost jobs in the oil and gas industry. Even with cuts, the state budget will come in at a cool $36.6 billion for the next two years. (The Texas Legislature, despite its broad responsibilities, meets only once every two years.)

Fastest-Growing State

And Texas still remains the fastest-growing state in the country.

“I’m talking about hot bodies, people who are living here,” Bullock said.

But Bullock also acknowledged that the oil bust had brought on other problems.

“It’s got pneumonia and it’s passing a cold on to other related industries, including government,” he said.

Lt. Gov. William Hobby thinks the problems of the state can be mended through high-tech expansion and an increase in the sales tax. An income tax, he said, is out of the question.

Arnold, the economist, said he was “cautiously optimistic” that Texas would find a cure for the oil pneumonia.

Schlueder, the state representative, said,”We’re not broke and we’re not going to be broke.”

Still, the bloom is off the rose, and that was probably best summarized by Garry Mauro, the state’s land commissioner.

“So we had a 10-year honeymoon,” he said, referring to the years of plenty. “Now we’re back to 1974.”