Economies, of any kind, feature winners and losers, and Texas’ 2020 economy is no different. Unfortunately, this year’s turmoil yields more of the latter than the former.
One of those losers has been the state’s previously principal winner — the oil and gas industry — and derivative of that, the state’s savings account.
The Texas Comptroller of Public Accounts announced Tuesday a $2.27 billion transfer to the state’s Economic Stabilization Fund (ESF), colloquially referred to as the “Rainy Day Fund,” and its State Highway Fund (SHF). Each fund received half of the transfer total.
Annual contributions from the state seed the ESF and SHF with 75 percent of oil and gas production, “severance,” taxes collected above 1987 levels — every dollar collected above $531.9 million for oil and $599.8 million for natural gas. One half of that total, this year equaling $2.27 billion, is deposited by the comptroller into each fund.
Surely no handful of crumbs, the total is still a significant drop from 2019’s transfer of $3.33 billion after a record year of success for the state’s paramount industry — a 32 percent drop. Texas’ Comptroller of Public Accounts, Glenn Hegar, warned of this possibility back in March.
The transfer is also lower than that of Fiscal Year (FY) 2019, but still more than during FY 2018.
Last year capped off a booming decade for the state’s energy industry. Oil and gas production soared with the fracking renaissance, and Texas’ wind energy came into its own leading the country. But since a one-two punch — a global supply glut and pandemic-caused plunge of demand — was delivered squarely on the chin of the oil and gas industry, choppy waters have been the norm.
After the initial hit, natural gas recovered better than crude oil since electricity generation remained in high demand, just with a market shift toward residential use with more people staying home than before.
Renewable energy, meanwhile, has not experienced the same hit. Wind energy reached its highest point of market share back in April. Wind energy’s success comes at the expense of coal generation, which had already been long in decline due to natural gas’ supplantation.
But for crude oil especially, 2020 has been a terrible, no good, very bad year. Back in April, the futures price for West Texas Intermediate crude oil plunged to depths previously uncharted, troughing at nearly -$40 per barrel.
After the initial price drop, from between $50 and $60 per barrel down to about $40, producers ramped up production to try and close the gaps in profit, as most had exorbitant debts to be paid.
With the influx of more supply, panic selling set in as a storage shortage resulted in traders essentially paying to offload their previously agreed-to supply.
This shock to the market has borne abounding uncertainty. According to the Wall Street Journal, ExxonMobil bleakly adjusted its next-decade price outlook. But despite it, Texas’ oil and gas industry has shown signs of recovery. In October, it added 600 jobs — a modest but not insignificant testament of recovery.
And, a broader indicator of recovery, consumer spending rose in the third quarter by 0.5 percent but it’s unclear how much of that will translate to travel — a large contributor to the success of crude oil.
An outside factor now in the mix is the prospective new federal leadership. President-elect Joe Biden has promised to ban new drilling permits on federal land and phase out existing ones.
While Texas would be less affected by this than other states which encompass far more federal land, an analysis from the American Petroleum Institute estimates 122,000 oil and gas jobs in Texas would face the chopping block.
Biden says lost jobs would be made up for in green energy initiatives spearheaded by the federal government, but turning an oil and gas worker into a renewable energy worker is not a matter of semantics. Retraining an entire workforce would require time and money of no small consequence.
Due to the oil and gas industry’s ties to state finances, let alone the entire economy, the 87th Legislature will have one of the most quintessential issues of all dumped on its lap: state finances.
The comptroller estimates a $4.6 billion deficit from original projections for the 2020-2021 biennium due especially to the pandemic. On top of that, commitments already made back in the 86th session and the depressed tax collections will cause the ESF balance to slump lower than expected.
After this transfer, the ESF will have roughly $10.7 billion available before additional spending or adjustments are made.
In addition to the pandemic’s direct problems, Governor Greg Abbott, Lt. Governor Dan Patrick, and presumptive Speaker Dade Phelan (R-Beaumont) will have their work cut out for them with subsidiary issues when the body convenes in January.
Disclosure: Unlike almost every other media outlet, The Texan is not beholden to any special interests, does not apply for any type of state or federal funding, and relies exclusively on its readers for financial support. If you’d like to become one of the people we’re financially accountable to, click here to subscribe.