Ed Yardeni on Texas' Oil Problem

by Marilou Moursund on January 27, 2015

in Energy,housing,interest rates

From Ed Yardeni’s Morning Briefing today:

The problem was caused by Houstonians and other Texans contributing to a flood of oil supplies. Several oil market observers have observed that shale oil output isn’t likely to decline in response to lower oil prices until the second half of the year. Indeed, while the price of crude has dropped by over 50% since last summer, US crude oil field production rose to 9.2mbd during the 1/16 week. Leading the way higher is production in Texas, which rose to 3.8mbd, up 2.3mbd from the first week of 2011. As a result, US crude oil inventories rose to a record high for early January at 397.9 million barrels.

Not surprisingly, Texans are now wondering if they could be heading for a crash comparable to what happened during the oil bust and banking crisis of the 1980s. An article (http://www.wsj.com/articles/plunging-oil-prices-test-texas-economic-boom-1420428781) in the 1/4 WSJ titled: “Plunging Oil Prices Test Texas’ Economic Boom,” observed: “The Lone Star State’s economy has been a national growth engine since the recession ended, expanding at a rate of

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4.4% annually between 2009 and 2013, twice the pace of the U.S. as a whole.” Furthermore, one in seven jobs created nationally during the 50-month expansion were in Texas.

A banking crisis is unlikely this time. However, there is already some evidence that the oil industry’s latest misfortune is trickling down to the state’s economy. Yesterday’s release of the Dallas Fed regional survey for January showed a sharp decline in the production index (from 16.4 in December to 0.7) and in the new orders index (from 2.7 in December to -7.7). However, the employment index remained above zero at 9.0. Texas has a more diversified and more services-oriented economy than it did during the 1980s oil bust.

The good news is that lower oil prices amount to a huge windfall for US consumers, which should more than offset the bad news for the US oil industry. Previously, Debbie and I estimated that the current drop amounts to more than $200 billion in fuel savings for Americans. That certainly explains why Bloomberg’s Consumer Comfort Index has been soaring in recent weeks to the highest since July 2007.



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