Tuesday, January 13, 2015

Rick Perry's Texas Miracle is leaving with him

You can't really blame the guy for being stupid enough to run for president again after his 2012 debacle.  That was just a one-off; he's been crazy lucky all his life, after all.  But the circumstances surrounding the state's economic winning streak are not being extended to his successor.

“This is going to be a painful period of time,” explained Texas Governor Rick Perry. The oil price plunge is going to make things “very uncomfortable” in the oil patch of Texas. There would be “a bit of belt-tightening in places,” and some areas would “have to make some changes,” he said.

His speech to a conservative forum on Friday in Austin made one thing clear: for Texas, the largest oil-producing state in the nation, the oil bust won’t be easy, even if seen from the perennially optimistic point of view of a politician.

Some oil companies are starting to lay people off, some are are already going bankrupt.

Yet, even as capital expenditures are getting slashed brutally, companies have not lowered their production forecasts.

And they won’t, at least not for a while; they’ll keep pumping at the maximum rate possible, especially now that revenues from unhedged production have been plunging – while the costs of servicing their mountains of debt have remained the same, and rolling over that debt has become a lot more expensive. Cutting back on exploration, drilling, and completion stems the cash outflow, but it doesn’t cut production, not until the decline rates of existing shale wells start making a visible dent into it.

The market price of oil hasn't touched bottom yet.

Analysts say that richer (OPEC) cartel members like the United Arab Emirates have been ready to accept the price fall in the hope that it will force higher-cost shale producers out of the market.

"We cannot continue to be protecting a certain price," UAE Energy Minister Suhail al-Mazrouei said. "We have seen the oversupply, coming primarily from shale oil, and that needed to be corrected," he told participants in the Gulf Intelligence UAE Energy Forum in Abu Dhabi.

Oil prices continued their slide towards six-year lows in Asian trade on Tuesday after Brent crude closed below $50 a barrel the previous day for the first time since April 2009. 

The fall came after Wall Street investment titan Goldman Sachs slashed its price outlook, adding to anxiety about global oversupply, weak demand and soft growth in the key Chinese and European markets.

One more from that Goldman report.

One such estimate for future crude oil prices became available Monday, predicting West Texas Intermediate (WTI) crude prices of $39 and $65 a barrel in the next six and 12 months, respectively. Brent crude prices will fall to $43 in the next six months and rise to $70 by the end of the next 12 months.

So the reason this is important to Texas is because Jethro Bodine, Counter of Beans, is predicting something similar in his biennial state revenue forecast, upon which all spending decisions by the incoming legislature will be made.

Comptroller Glenn Hegar is forecasting that Texas lawmakers will have about $18 billion in new or carried over state revenue to spend in the next two-year budget...

A big part of Hegar’s comparatively optimistic forecast: He estimates the price of West Texas intermediate, the benchmark for oil in commodity markets, will be $64.50 in fiscal 2015 and $69.25 the following year. That’s a slow but steady rebound from current prices.

So if he (and Goldman Sachs and everybody else) just happens to be wrong about that, then Texas' books are cooked.  Sid Miller's cupcakes are going to be in a pickle and Dan Patrick's plans to cut property taxes will turn into a big pot of stew for him to steam in.  Oh, and the governor-elect's ideas about spending more money on road and highway improvements go off into the ditch as well.

A sustained period of $40 dollar oil is going to crush the hardhats in the oil patch, eventually catch some petroleum engineers in its undertow, wreck the state's finances, and maybe even screw up the political futures of a few Texas Republicans along the way.  So keep your fingers and toes crossed that the sheikhs are bluffing, and that WTI will rebound just as soon as all those TeaBaggers in the sticks buy a few more big SUVs and new Ford pickups.

I suppose the truly desperate among us could pray for a refinery explosion or two, maybe another terrorist attack, or a wider war in the Middle East to disrupt production.  Oversupply being what it is, when Mitch McConnell is kneeling over the Keystone XL pipeline with a wrench, you know things are already bad.

Socratic Gadfly has more.  Update: And so does Charles, but without mentioning much about the future price of crude's impacts.  And Lisa Gray has this.

If you've lived in Houston long, you recognize this moment: the haunting, suspended-in-motion months when we all know that the city's roller-coaster economy has entered a dive, but while we still hope that maybe it won't be bad, that maybe Texas is diversified now, that maybe OPEC or Libya or something — anything — will change.

Sure, there've been oil-related layoffs here and there, and sure, people are asking questions about loans and banks and the risks that frackers have assumed. But with oil under $50 a barrel, Houston remains eerily normal. We see the car crash coming, but haven't felt the impact; the ball, thrown in the air, slows at the top of its arc; the hurricane might still change its path.


Gadfly said...

Linked back to you. And, per the political angle, added this at the end of my piece:

"Hegar simply seems to be imitating national-level Republicans who offer up bullshit for economics on a regular basis, usually, as here, as a prelude to justifying spending cuts and tax breaks for the rich."

Gadfly said...

And, true that last part. Houston, since the last big crash, has remained more oil-dependent than the Metromess. Heck, some have said San Antonio might get hurt worse this time than DFW, because of how much this will hit Eagle Ford.

cactusflinthead said...

Even if I do live in DFW area the price of oil still impacts me. Right at this very moment it is in a positive way. Cheap gas means I have more money to spend on other things. The negative impacts might not be felt here very much. The rest of the country is thrilled that they might get through this winter with lower heating costs. Anybody in transportation is also thrilled. What is the overall impact?
Nobody knows. I have heard it called a stimulus to the lower end of the class spectrum.

The questions I have about it are whether the OPEC cartel is really going to stick together and early indications are they will do whatever they think is best for themselves. The Russians and Venezuelans cannot afford to cut back on production. The UAE wants to keep market share so they are running blue light specials. The Saudis want to see shale suffer and if by extension the can gig the Russians too with the approval of the US well..it depends on who you ask as to why this is happening. Lower demand, too much supply, squash shale, costs of getting it out of the ground for the ME vs here. Yada yada, I can find five different guys saying five different things and none of them are very convincing. The most honest reply was from some guy I read on Reuters a week or so back. "Ask me in about six months."

just for grins here is a thread over at the Shaggybevo, which despite being at least in theory about all things Texas Longhorns, has some interesting conversations.

Under the heading of 'Hey oil barons...."


PDiddie said...

Cactus, those of us who only buy gasoline and don't depend on a bi-monthly direct deposit from XOM, Shell, and the like are of course the big winners.

In that respect I have expected to see lower prices at the supermarket, since there's so much cost of freight built in, but that hasn't been the case as yet.

Eventually the job cuts will trickle down on everybody as result of this commodity collapse. It's historical. Click through the slideshow here for the fastest explanation I have seen of the boom and bust cycles in Texas and the US.