By Collin Eaton and Jon Hilsenrath
Texas had one of the best economic records of any U.S. state
after the 2008 financial crisis. In this crisis, it faces the
prospect of a deep and prolonged downturn.
The Lone Star State is exposed to many of the pandemic and
shutdown's economic ill consequences, with three cities -- Austin,
Houston and Dallas -- home to an abundance of service-sector jobs,
especially at risk. A downturn in the oil industry and other
businesses big in Texas, including airlines and ports, will likely
amplify its pain. Industry analysts expect the oil downturn to
outlast the current viral outbreak.
Oil prices surged late last week on hopes of a global pact
involving Russia, Saudi Arabia and possibly the U.S. to cut crude
output. But the prospects are uncertain, and even sizable oil
production cuts would fall short of making up for the enormous drop
in demand for fuels caused by coronavirus. Prices remain below $30,
at levels where most Texas producers cannot make money.
Initial claims for unemployment benefits rose by 259,652 in
Texas during the two weeks ended March 28, non-seasonally adjusted
Labor Department data released Thursday show. Layoffs hit a broad
range of businesses including accommodation and food services,
transportation, health care, oil and gas, manufacturing, retail,
real estate and construction, the data showed. Two major shale
producers are asking Texas regulators to consider curtailing crude
output for the first time since the 1970s.
For Texas, "there's no avoiding this one," said James Gaines,
chief economist at the Real Estate Center at Texas A&M
University.
From his job at a Houston machine shop, Kenny Istre saw
customers withdrawing orders and demanding discounts for drilling
equipment at Taylor Oilfield Manufacturing Inc. even before U.S.
crude prices plunged. Prices were about $28 a barrel Friday, down
about 54% from the year's start.
Prices in early Thursday trading surged 30% following President
Trump's tweet he expects Saudi Arabia and Russia will cut back on
production.
After riding out downturns in each of the past four decades, Mr.
Istre, the shop's vice president, knows what's coming for Texas: A
demand drop caused by the coronavirus is meeting an oil-supply
surge created by a Saudi-Russian price war. Most of his 20
employees have stopped coming to work following a countywide order
to stay home.
"This is like a double whammy," he said. "They were canceling
flights every day, and now people aren't driving to work. The
market is going to be flooded with oil."
President Trump promised to support the struggling oil industry
in a meeting Friday with the chiefs of Exxon Mobil Corp.,
Occidental Petroleum Corp., and several others, but few details
emerged.
Even the world's biggest producers can do little to stop the
crippling effects of coronavirus. Mr. Trump has not said whether
the U.S. will mandate cuts.
Economic growth in Texas, the second-most-populous U.S. state
after California, has been closely linked to oil since a 1901
gusher at Spindletop east of Houston set off a boom. That
interdependence brought prosperity but also the constant threat of
busts -- such as in the 1980s, when an oil-price crash led to a
deep regional downturn, job losses in the tens of thousands, and
hundreds of bank failures on the back of faulty loans.
Texas has become more diversified since and had one of the best
economic expansions in the U.S. over the past decade, thanks partly
to the shale-drilling boom. Its economic output grew at a 3.5%
annual rate from 2009 through September 2019, outpacing every state
except North Dakota and Washington, Commerce Department data show.
Employment since December 2009 had grown by 2.7 million by January,
accounting for nearly one in eight jobs created in the nation over
that stretch, according to the Bureau of Labor Statistics.
Then-Gov. Rick Perry proclaimed the state's postcrisis
performance a "Texas Miracle."
Not even Texas' economic diversity will be a cushion now,
because so many industries it developed are exposed. Energy,
transportation, retail, accommodation and restaurants together
account for 21% of its private-sector output, compared with 13% for
the nation, Bureau of Economic Analysis 2019 data show.
The price of an oil barrel still reverberates in Texas. Mining
output -- mostly from oil and gas -- was 9% of its $1.8 trillion
GDP in 2018, compared with 1.7% for the broader U.S.
Oil production boosts state coffers in many ways, including
through royalties Texas receives for drilling on state lands. The
Texas General Land Office last year generated $646 million in oil
royalties that ultimately help pay for school textbooks and
computers. In the last downturn, those royalties fell 24% from 2014
to 2016. The Permanent University Fund generates royalties from 2.1
million acres primarily in West Texas, which help sustain the
University of Texas and Texas A&M University.
Crude-oil prices dropped 57% during the last oil bust starting
2014, 77% during the 2008 financial crisis, and 65% during the
mid-1980s.
More than 50 oil and gas companies, including Pioneer Natural
Resources Co., EOG Resources Inc. and Concho Resources Inc., have
collectively planned to cut spending by about $27.6 billion and
scaled back drilling plans. Houston's Occidental Petroleum Corp.
has cut payouts. Austin's Parsley Energy Inc. has slashed executive
pay.
The oil-field-services firms that do much of the on-the-ground
work for producers and employ thousands in Houston and Midland cut
jobs quickly, some as much as 25% by the end of March, said Richard
Spears, vice president at energy-consulting firm Spears &
Associates and chairman at energy-construction firm Evolution
Engineering Inc.
Drillers have idled 69 rigs in Texas, bringing the statewide
count to the lowest in three years at 338, according to Baker
Hughes Co. Halliburton Co., the oil-field services firm, said it
began furloughs of roughly 3,500 Houston employees for up to 60
days starting March 23. Its rival, Schlumberger Ltd., in March said
it planned to cut U.S. jobs and pay but declined to provide
details. Services firms are set to cut 100,000 jobs tied to oil
activity in Texas this year, according to consulting firm Rystad
Energy.
A looming job-market crunch will likely be 0.5 to 1 percentage
point worse in Texas than the rest of the nation due to its
exposure to energy, said Keith Phillips, assistant vice president
at the San Antonio Branch of the Federal Reserve Bank of Dallas.
The state's oil-price downdraft, he said, could outlast the
coronavirus's spread.
Many shale drillers are also having trouble accessing financing,
as investors have fled the sector following years of poor returns.
"We're in for a bigger downturn," Mr. Phillips said, "because of
the lack of available capital."
More than 70 debt-burdened U.S. oil producers are at risk of
bankruptcy at current prices, and roughly half of those are
headquartered in Texas, according to Rystad.
Coronavirus fears have slammed Dallas and Houston-area airline
hubs and Texas-based Southwest Airlines Co. and American Airlines
Group Inc. The virus forced the cancellation of Austin's South by
Southwest tech-and-culture festival and Houston's Livestock Show
and Rodeo, which generate hundreds of millions in economic
activity, according to organizers. The rodeo, which drew over 2.5
million visitors last year, was cut short after a Houston-area man
who had attended a barbecue cook-off tested positive for
coronavirus.
As of Sunday, Texas had 6,812 confirmed Covid-19 cases and at
least 127 deaths, according to its Department of State Health
Services.
Counties locked down the state's major cities in mid-March,
while Texas had ordered bars to shut and restricted restaurants to
take-out only. On March 31, Texas Gov. Greg Abbott issued an order
requiring "every person" statewide to minimize social gatherings
and contact with people outside their homes, except for essential
services.
For most of March, Mr. Abbott had avoided a statewide lockdown
because scores of remote counties hadn't been touched.
The Labor Department data show Texas's rise in initial
unemployment-benefit claims during the two weeks ended March 28 was
lower than in California and New York, which had ordered statewide
lockdowns earlier.
Texas Comptroller Glenn Hegar in March tried to get an early
glimpse of the virus's impacts by watching online reservations drop
on OpenTable, an app for restaurant reservations. When eateries
shut their doors, the data became useless, he said. He expects a
U.S. recession, with Texas dragging behind.
The Houston office market was just starting to recover from the
most-recent oil-price drop. The availability rate, which includes
vacancy and sublease space, was beginning to decline after rising
from 12% in 2013 to about 23% in 2018, according to CBRE Group
Inc., the commercial real-estate services firm.
Even before the current crisis, the Texas oil industry's job
picture hadn't recovered. The industry lost one in three jobs from
the peak of the boom in 2014 to the end of the bust in 2016. Most
of those jobs didn't come back because drilling companies learned
to extract more crude with fewer workers and rigs. Some are working
for less.
Houston geologist and engineer Todd Armstrong, 62, said he makes
about a fifth what he took home in 2014. He is pulling from
retirement savings to pay bills and will again for college tuition
for his daughter. "I'm lucky to have a job," he said.
'Total shutdown'
In Midland, in the heart of America's most prolific oil field,
the Permian Basin straddling Texas and New Mexico, industry
veterans are bracing for the worst. Simon Cross, 37, a pipeline
inspector in nearby Odessa, Texas, who lost his job a month ago,
said: "I think it's about to be a total shutdown."
Pat Dennis, a salesman for an oil-field repair shop near Odessa,
said he was furloughed without pay until further notice as of last
week. He said 30 of his 50 co-workers have been laid off, with many
of the rest working fewer hours.
Mr. Dennis, 57, has lived through a dozen oil-patch downturns,
but everything happened faster on March 9. "On Sunday, we were
fine," he said. "Then on Monday we were all of a sudden in an
emergency, and everything was shut down."
Josh Lorenz, president of private Midland operator EnCore
Permian, said he expected a wave of layoffs and bankruptcies, as
smaller producers cut spending 50% to 80%. His firm aims to slash
up to $35 million in spending this year, reducing activity that
generates royalties for two key landowners, University Lands and
the Texas General Land Office.
"We're going to drill as soon as it's an economic price for
everyone, which is probably in the mid-40s" in dollars a barrel,
Mr. Lorenz said, adding his firm is trying to get leeway on the
timing of some drilling obligations.
The General Land Office said it is willing to work with oil
companies within its statutory authority but has a fiduciary duty
to Texas students to generate the highest revenues possible. The
University of Texas System said it projects mineral income in
fiscal 2020 could decline 30% from about $1 billion in the previous
fiscal year if oil prices don't rise substantially.
Paul Hotze, owner of Paris Texas Apparel Co., recently closed
his West Houston store's doors and is focusing on his online
business, which has raised overall sales 5% over the same month
last year, despite the headwinds.
Knowing his oil-industry customers would be hurting, he tried
lightening the mood by designing baseball caps that declare: "Make
Oil $80/bbl Again." They sold out online, and his store ordered a
third batch of 750 he said is close to selling out.
--Katherine Blunt and Peter Grant contributed to this
article.
Write to Collin Eaton at collin.eaton@wsj.com and Jon Hilsenrath
at jon.hilsenrath@wsj.com
(END) Dow Jones Newswires
April 05, 2020 15:23 ET (19:23 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.