Steve Matthews, Lauren Etter and Jeanna Smialek (c) 2014, Bloomberg News
Business at Chris Meyer’s Ace Hardware store in Cotulla is booming four years after oil companies began rolling into the dusty South Texas town, invigorating a once- stagnant economy.
“We were in a 17-year drought and now it’s raining,” Meyer said. “And we’re tickled to death that it’s raining.”
The forecast may be about to change.
While slumping crude and gasoline prices are projected to boost the nation’s economy by leaving more cash in consumers’ pockets, they also threaten to limit growth, tax revenue and job opportunities from Texas to North Dakota. By restraining new industry investment, the declines are set to subdue the most rapidly expanding U.S. regions.
“For oil producers, it means an adjustment in terms of expectations and a realignment in terms of capital-spending plans,” said Nathaniel Karp, chief U.S. economist at BBVA Research in Houston. “That implies that we’re going to see slower growth.”
Rising energy prices, which coincided with the end of the recession in 2009, and improved drilling methods including hydraulic fracturing spurred rig counts and put the U.S. on the road to energy independence.
A subsequent hiring binge at companies such as Exxon Mobil and closely held Endeavor Energy Resources drove spending at hotels, restaurants and retailers — including Meyer’s hardware store. Such secondary economic effects made North Dakota and Wyoming the fastest growing U.S. states last year.
The momentum is poised to slow. Crude oil fell to $54.11 a barrel on the New York Mercantile Exchange Dec. 18, down 49 percent since mid-June, reflecting the highest domestic production in three decades and slowing global demand.
The stakes are high for business owners such as Meyer in the heart of the nation’s oil patch. In 2013, he took out a loan to raze his 2,500-square-foot store and replace it with a building more than three times as big. Cotulla, 90 miles southwest of San Antonio, sits in the heart of the Eagle Ford shale-oil region, one of the state’s newest and most prolific fields. With the dawn of fracking, it has morphed from a sleepy, poverty-stricken dot on the map to a bustling hub for oil exploration.
“If lower oil prices persist through 2015, the economies and finances of the energy producing states — Texas, Louisiana, Alaska, Wyoming, New Mexico, Oklahoma and North Dakota — will be put to the test,” according to a Dec. 10 report from Standard & Poor’s Rating Services.
The region comprising Texas, Oklahoma, Louisiana and Arkansas will expand by 7.4 percent in 2014 and 3.9 percent in 2015 — down from 19.2 percent in 2012, according to S&P’s projections.
In North Dakota, home to the Bakken shale formation, “what we are hearing is that if prices continue, we can expect some near-term softening in shale-oil development,” Dean Bangsund, a research scientist at North Dakota State University, wrote in an e-mail.
Drive 20 hours and more than 1,200 miles south to Midland, Texas, and the outlook is also a bit dimmer.
Cities in the Lone Star State led the nation for hiring during the past year. Employment in the west Texas town of Midland, whose motto is “Feel the Energy,” boasted the largest gain with a 7.2 percent advance in payrolls from October 2013, according to Bureau of Labor Statistics data. Among the largest metropolitan cities, Houston claimed top spot, with a 4.3 percent increase.
That may be about to change. For every 25 percent drop in oil prices, employment could decline 0.6 percent in Texas and 0.8 percent in Louisiana. Wyoming stands to lose 2.1 percent of its jobs and North Dakota and Oklahoma about 1 percent each, according to research by Stephen Brown, a professor of economics at the University of Nevada-Las Vegas, and Mine Yücel at the Federal Reserve Bank of Dallas.
In Houston, the fourth-largest U.S. city, employment growth probably will slow to 2.8 percent in 2015 and 0.7 percent in 2016, said Robert Dye, chief economist at Comerica in Dallas.
“This is a downdraft that will be felt throughout the entire Houston economy,” Dye said of the oil-price drop. “We are expecting significant economic drag.”
A protracted pullback could push Texas into a recession, according to JPMorgan Chase Chief U.S. Economist Michael Feroli. In a report issued Dec. 18, he compared the current situation to a similar slump in the 1980s when a Texas oil boom turned into a bust, roiling the housing market, spurring widespread area-bank failures and spawning a “painful regional recession.”
Such an outcome would mean smaller state and municipal coffers. Oil and mineral revenue accounts for 87 percent of the budget in Alaska, 31 percent in Wyoming, 17 percent in New Mexico, 13 percent in Louisiana and 4.8 percent in Texas, based on the Standard & Poor’s report.
“Lower extraction will hurt state-tax revenues,” said Chris Lafakis, senior economist at Moody’s Analytics in West Chester, Pennsylvania. In the Bayou State, tax revenue from oil “could fall $90 million short of Louisiana legislators’ projections.”
Moody’s Investors Services revised its outlook for Alaska this week to negative from stable. “Just as the state has benefited from high oil prices in recent years, prices well below previous expectations could lead the state to substantially reduce its financial reserves,” Moody’s said.
Some communities may find it difficult to pay bond holders. Voters in Cuero, Texas, approved a $76 million offering last year to build two new elementary schools and a performing-arts center.
“If the drilling is curtailed for any length of time or pulled back because of lower prices and the tax base begins to fall, that debt will still be out there,” said DeWitt County Judge Daryl Fowler.
For the national economy, reduced prospects for energy- producing states will be masked by stronger consumer spending, with Americans paying less to fill their cars’ tanks and heat their homes. The nationwide average for a gallon of gasoline fell to $2.48 on Dec. 18, the lowest since October 2009.
“Consumers gain more than domestic producers lose,” said James Hamilton, an economist at the University of California-San Diego and former visiting scholar at the Fed, whose research focuses on energy.
Each 1 cent decline, sustained for a year, reduces consumer spending on gasoline by $1.1 billion, according to Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh. The drop can be considered a “middle-class tax cut” because these households spend the most on gas, Goldman Sachs Group’s Kris Dawsey wrote in a Dec. 9 note to clients.
That’s good news for shoppers in Mississippi and South Carolina, where gasoline expenditures take up the largest share of disposable income, based on a Moody’s Analytics analysis.
In Cotulla, a town of more than 3,600 residents near a ranch owned by country music icon George Strait, a rebound in oil prices probably would bring a few more smiles. Home to new hotels and restaurants, the city recently issued a $9.5 million bond for projects that include building a new city hall, adorning the streets with gaslights and paving badly rutted roads. Its sales-tax revenue swelled to more than $3 million in 2013, up from $445,000 in 2009, according to city figures.
Larry Dovalina, the city’s administrator, said it’s too early to worry whether lower crude oil-prices are here to stay.
“I know there is some slowdown,” he said in an interview at City Hall, his feet kicked up on his desk as tanker trucks rumbled through the streets. “But there’s no reason to panic.”