Home Forums Hunting & Shooting Hunter's Campfire Double Black Swan Hitting Texas Drags Down the Rest of the U.S.

In all his years in the Texas oil patch, the billionaire Russell Gordy has never seen a bust like this.

© Brittany Sowacke / Bloomberg
The nightmarish collapse in crude prices that has accompanied the coronavirus pandemic is sinking fortunes across the Lone Star State, the nation’s second-largest economy. And not even Gordy, an oilman since 1973, can see a clear way out.


“Right now I’m paying people to take my oil,” he said. “I don’t see an end to this.”

From the “Energy Capital” of Houston to the shale center of Midland, the Texas oil-and-gas sector is sinking fast, heightening the pain for the broader U.S. economy. The state’s sheer size -- it accounts for 9% of total U.S. output -- means the shock here will reverberate on a national level.

If Texas can reopen successfully -- and moves to do so are already underway -- it could bolster the state’s GDP this quarter, but it also risks a false start and second shutdown amid a spike in cases and deaths that would prolong a recession there, according to Moody’s Analytics.

Texas is more than just oil -- with a population of 29 million it has developed substantial health-care, finance and technology industries, but at its core is energy. Oil drilling there all but ground to a halt last month as the global coronavirus pandemic and the Saudi Arabia-Russia price war in March contributed to a glut so big the U.S. has almost run out of storage for excess crude.

Declining energy prices have helped the consumer-led U.S. economy in the past, but this year’s drop is likely to cut into investment and employment. Texas alone may lose 1.3 million jobs by June, according to estimates by economists at Moody’s Analytics.

Top Spot
“The coronavirus crisis is putting an end to the U.S. shale-oil revolution,” said Thomas Costerg, senior U.S. economist at Pictet Wealth Management in Geneva. “Weakness in the domestic oil sector may spill into a broader downturn for Texas and also start to drag the rest of the U.S. with it.”

The Permian Basin, the world’s largest shale-oil field, stretches from West Texas into New Mexico and has played a major role in catapulting the U.S. into the top spot among global oil producers. With ample refineries and ports, Texas exports account for 20% of America’s total.

The surge in U.S. oil production played an important role in recovery from the 2008 financial crisis, adding 169,000 jobs across the country between 2010 and 2012 -- 10 times the national rate. President Donald Trump has extolled “American energy dominance” in his re-election campaign.

That dominance now is threatened. Crude-oil prices dropped below $20 a barrel in April, from an average of more than $50 last year, and briefly went negative amid trader concerns about storage space. Crude has rallied this week as companies begin production cuts and U.S. explorers shut down rigs. But gasoline prices are below $2 a gallon across the country, with little benefit to consumers, who have sharply curtailed driving and flying amid stay-at-home restrictions.


‘It’s Horrible’
Gordy, 69, who’s diversified his operations into agriculture and real estate, says the pain has spread throughout his empire.

“I’m in the cattle business and it’s horrible,” he said. “There’s nowhere to sell my cattle, all the meatpacking plants are closed. I’m in retail in Houston and it’s going to be years -- if ever -- if that comes back. All the real estate values are going to be down tremendously.”

The ripple effects reach beyond Houston and the oilfield hubs of Odessa and Midland in West Texas. Dallas and other cities have benefited in the past from widespread commercial and residential development as thousands of workers moved, or immigrated, for jobs and relatively low costs of living. That’s now in danger.

“What many people may be missing in Texas is growth in itself is a big industry,” said Mark Vitner, senior economist at Wells Fargo Securities, who sees an uneven recovery for the state. If fewer people move in the current environment and corporate relocations wither, that will be “a bigger shock than many people realize.”

Texas avoided the worst of the housing-price crash following the 2007-2009 recession, which was led by Florida, Nevada, California and Arizona. But the consumer slowdown sparked by the virus and oil price decline will result in protracted hardship this time.

Home Prices
“The state is suffering a double black-swan event,” said Mark Zandi, chief economist for Moody’s Analytics, referring to rare occurrences with extreme impact. He’s expecting home prices will decline from the fourth quarter of 2020 through the first quarter of 2022.

Texas Governor Greg Abbott has started to reopen the economy, with restaurants allowed to accept customers for dine-in service at 25% of maximum capacity. Other services and stores also can resume operations, even as the virus continues to spread.

More than 900 people have already died, and the number of confirmed cases rose 3.2% on Tuesday to 33,369, according to the Texas Department of State Health Services. Hospitalizations surged 23% to 1,888, the most in more than three weeks.

For businesses, reopening is far from straightforward. The owners of Alice Blue, a restaurant in Houston’s Heights neighborhood that has offered takeout meals, said the four days’ notice they got was too little to adequately plan a return to full service.

Shipley Do-Nuts, where a line of cars typically snakes around its North Main Street drive-through on weekday mornings, remained shut early this week. Traffic along interstates 45 and 10, heavily traveled corridors connecting suburbs to Houston’s downtown, was mild.

When workers do feel safe enough to return to their high rises, that downtown may not look the same as it did before. Companies including Halliburton Co. have laid off thousands of employees in the energy capital. Beyond office jobs, the industry lost 51,000 drilling and refining positions in March alone, according to BW Research Partnership.

“I could see 50-80% of independent oil companies disappearing,” said Gordy, who adds he’s “fortunate” his oil business has no debt. “We’re healthy, my family’s healthy. We had a good life. I’m OK, but I’m worried about my children and grandchildren. It’s pretty devastating.”

I spent a lot of time in Odessa and Midland, driving through on the way to El Paso. It was astonishing to see the growth of the oil industry there since 2011. I would say it has tripled, based on the number of oil pumps, new motels, new trailer and RV parks, and new truck stops. It WAS an immensely wealthy area.

If you have never been to Texas you imagine there are oil wells all over the state. That is not true, the only areas I saw were Odessa/Midland, and then an area about 50 miles south of San Antonio on I35. The place with all the Japanese monkeys.

There used to be a few out toward Seguin, southeast of San Antonio. I had an ol' Texas boy tell me years (45) ago there was a big pool of oil down deep south and east of San Antonio. They just didn't have a need to drill for it yet. He was from the Stockdale area. A former U.S. Marshall.

kwg

Maybe they should sell that Swat armored vehicle they raided the bar with.... and cut the deputies pay and make them join a damn gym..... too many donuts for them Texas cops

Big oil will be fine, always was, and will be for another couple of centuries, I believe.

Big oil will be but it’s the smaller independents that provide a lot of the jobs and revenue for the state. A lot of those are going to go under or be taken over by the majors

Gosh....poor guy.

Yes I think that is true, hate to see smaller operators go under.

That sorta seems like the natural progression however.

That wouldn't happen to be today's Eagleford area would it......?

Eagle Ford Shale.

I took it he was talking about the Seguin and Stockdale area. If Eagleford is in the area then yes.

kwg

Any business that's profit margins are dependent on the price of a comodity that fluctuates wildly over periods of time will bring happiness and sorrow, good times and bad. Energy production, farming, construction....in good times you better be planning for the next downturn at all times.

That's the Eagleford, it runs from there all the way to the border

Sad, but same song, 4th verse............

Especially one whose price is controlled by New York jews.

Oh boy you better go get yourself a flame suit.

Yep. Our boys in Texas got sold out by the politicians for empty promises by forked tongue Arabs. I hope the house of Saud gets what's coming to them in spades.

Good advice. When times are good pay down any and all debts.