Impacts of Declining Oil and Natural Gas Prices

The recent decline in oil and natural gas prices has left people with mixed emotions. While everyone has more money leftover after a trip to the gas station or after paying the electric bill, there’s still concern about the effect that lower prices will have on the Texas and U.S. economies. In a recent article, economist Dr. Ray Perryman reports that low oil prices are a net positive for the U.S. economy, but for energy-producing states like Texas, that may not be the case.

Part of the problem is timing. Cuts in capital spending by oil and gas companies have been immediate, while the positive impacts on the economy of low oil prices may or may not come later. Of course, it depends on how long crude prices stay low. Analysts are mixed, with some saying prices have bottomed out, while others say that prices will trend lower. Much of this uncertainty about future trends is due to the difficulty in predicting the behavior of the OPEC (Organization of the Petroleum Exporting Countries), especially Saudi Arabia, in the coming months.

Spending cuts by energy companies can have significant impacts on the economy. According tonew data from the United States Census Bureau, almost $1 out of every $8 in new business investment in the U.S. comes from oil and natural gas producers. Capital investment by the oil and gas industry is so significant that it is almost as large as the next three biggest sectors combined: electricity ($86 billion), hospitals ($51 billion) and wired telecoms, broadband and cable suppliers ($49 billion).

Within Texas, impacts will vary. The largest negative impacts will be in the major oil-producing regions like the Permian Basin in West Texas and the Eagle Ford Shale in South Texas. In the Barnett Shale area in North Texas, where mostly natural gas is produced, the positive effects of lower oil prices could offset the negative effects because the economy in North Texas is more diversified.  

Dr. Perryman projects that low oil prices will likely lead to a loss of 150,000-175,000 jobs in Texas next year – when all factors and multiplier effects are considered. This would mean that overall job growth in the state would be diminished, but not eliminated. Texas added over 400,000 jobs last year, so this means the rate of growth is expected to slow to 200,000-225,000, according to Perryman. This level is consistent with the growth the state was seeing before the recent spurt in energy activity, and is still a relatively healthy pace of expansion.

For now, oil prices are below a sustainable level, and no one knows how long they will stay there; however, oil and natural gas prices will go back up, eventually.