Why The Shale Miracle Has Happened In Texas
On his Carpe Diem blog on April 29, economist Mark J. Perry called the rapid increase in Texas oil output over the last few years “one of the most remarkable energy success stories in US history”.
He’s right. The rapidity with which oil and gas operators have ramped up development of huge oil-containing Texas shale formations, such as the Eagle Ford Shale in South Texas and the Wolfcamp/Wolfberry play in the Permian Basin, has been truly astonishing. Just three years ago, Texas statewide oil production had bottomed out at just more than 1.1 million barrels a day after a 25 year decline from the boom times of the early 1980s. By February of this year, that daily output had more than doubled, to 2.295 million barrels a day. “Astonishing” may not be a strong enough word, but I’m out of adjectives here.
The next day, on April 30, Kate Galbraith, writing in the Texas Tribune online newspaper, detailed what that rapid rise in oil production means to the Texas state treasury. Quoting James Lebas, a highly regarded fiscal consultant in Austin, the story relates that the oil and gas industry paid approximately $12 billion in Texas taxes during 2012, “up from $9.25 billion in 2011 and $7.4 billion in 2010.”
“It would be unambiguously positive for the state fiscal situation and local [economies], if oil production continues to rise,” LeBas said. “For most of my lifetime, it has been falling.”
“Unambiguously positive” is a great way to describe the effect the current oil boom is having on the Texas economy, and it is why the state’s economy has significantly outperformed the national economy in recent years. One important thing to understand is that economists will tell you that every dollar of capital invested by the oil and gas industry in Texas has a multiplier effect of an additional $3 to $4 in associated economic activity. When the oil industry is booming, every hotel is full, every café is crowded, clothing stores can’t keep enough socks, underwear and khakis on the shelves, and local supermarkets tend to run out of milk and eggs before each day is through.
So while Mr. Lebas quotes tax dollars associated directly with the oil and gas activity, it’s important to understand that the state has collected billions more dollars from associated economic activity in recent years. Thus, when the Texas legislature convened in January of this year, it faced the happy situation of having a budget surplus of $8 to $10 billion to work with over the next biennium. This compared to a revenue shortfall of around $25 billion the legislature had to deal with during its 2011 session. That’s a big difference in just a few years, and it has helped make this session one of the least partisan sessions in recent memory in Texas.
The other happy situation the legislature found upon convening was the fact that it would have about $12 billion additional dollars to work with in the state’s Rainy Day fund, which happens to be almost entirely funded by – guess what? – the state’s oil and gas severance taxes. Portions of this huge balance in the Rainy Day fund are currently being targeted by various pieces of proposed legislation to fund the state’s Water Plan, help counties with high levels of oil and gas activity to repair county roads, and to add additional money to the state’s public education system.
This is all happening in Texas for a variety of reasons, among them being: a) Texas is fortunate to have a variety of world-class oil and gas reservoirs beneath its surface; b) Texans are by and large used to having the oil and gas industry active in their communities and understand the benefits it provides; and c) the Texas state government works very hard to maintain a healthy legal and regulatory environment in which to do business.
Items b) and c) above are the factors that differentiate Texas from states like New York and California. Those two states also have world class oil and natural gas resources beneath their collective feet, but seem to be almost constitutionally incapable of taking advantage of them. The policymakers in these states really have very little understanding of the benefits of a healthy oil and gas industry – or really any industry, for that matter – and that makes them more vulnerable to falling prey to the phony arguments and fake “studies” put out by anti-fracking activists.
In Texas, policymakers are educated enough about the industry to identify nonsense as nonsense pretty much as soon as they see it. In New York, you have a Governor who appears to have adopted the anti-fracking movement’s transparent and interminable “study and delay” tactics as his official mantra for putting off any decision to develop that state’s rich shale natural gas reserves until after he leaves office. In California, Governor Jerry Brown appears ready to approve development of the enormous Monterrey oil shale – which some are projecting may turn out to be the largest oil resource ever discovered in North America – but is having a hard time overcoming a recalcitrant legislature filled with reactionary members like Assemblywoman Holly Mitchell, D-Los Angeles, who filed a bill on April 29 that would impose a moratorium on hydraulic fracturing until more “studies” can be conducted.
In other words, Ms. Mitchell most likely filed a bill that had been handed to her by one of the myriad anti-fracking activist groups that specialize in creating fear and uncertainty among policymakers who know little about the subject at hand. That’s how it works, all over the country.
Meanwhile, while all this “study and delay” is going on, California and New York continue to lose businesses in droves, many of which relocate to Texas, whose booming economy runs circles around their own. There’s no mystery how and why this is happening. The only mystery is why timid policymakers in California and New York can’t grasp the clear reasons why their own state economies continue to lag so far behind.
God Bless Texas.