Examining Texas' oil and gas industry amid pandemic

Texas’ oil and gas sector took a tumble in 2020 when the coronavirus pandemic was compounded by a Saudi Arabia-Russia price war that further devastated the global oil market. 

In May, two weeks after crude oil prices turned negative for the first time in history, Texas Railroad Commissioner Christi Craddick spoke with the Texas Tribune giving updates on how the industry was handling the downturn.

"Last year, [oil and gas] was about 35% of the state's economy ... and so [because this industry] is down ... it's gonna affect everything," Craddick said.

Craddick repeated that same figure in a tweet earlier this month as she advocated for prioritization of the Railroad Commission — the state’s oil and gas regulatory agency — in next year’s state budget. 

"Oil and gas is 35 percent of the state economy, making the (Texas Railroad Commission’s) budget an important priority," she said.

Texas oil and gas producers have suffered the double blow of COVID-19 and the global price shock amid an era when the industry is facing a process of structural contraction. Oil and gas has long been a primary driver of Texas’ prosperity, but does its share of the state economy remain at 35% even after a historically tumultuous year?

Determining the oil and gas’ industry’s share of the state economy "is a hard number to pin down," said Jesse Thompson, senior business economist at the Federal Reserve Bank of Dallas.

There’s a multitude of ways an industry’s economic impact can be measured, Thompson said. Impact could be an industry’s share of a state’s gross state product, or the number of jobs it creates, or the amount of income it generates, or some combination of the three. 

Furthermore, there are three different levels upon which economists analyze economic impact: an industry’s direct, indirect and induced effects on the economy. Direct effects include the revenue generated by oil and gas companies; indirect effects include the businesses supplying equipment or services to those oil and gas companies; and induced effects include the spending of people in the industry as a result of increased personal income. 

For example, induced impacts could include an interior decorator in Houston who is hired by an oil and gas employee.

"There’s a lot of very reasonable ways to break this up, that’s why there’s not necessarily a right answer," Thompson said.

Direct impacts are the most straightforward measurement. According to the Bureau of Economic Analysis, a federal agency, the oil and gas sector directly comprised around 15% of the state’s gross state product between 2019 and early 2020. That share fell to around 14.2% as the coronavirus swept the globe and forced the industry to shed jobs and shut down drilling rigs in the second quarter of 2020, the latest period for which economic data is available.

According to Craddick’s spokesperson, the 35% figure Craddick cited represents the oil and gas sector’s direct impacts to the gross state product combined with its indirect and induced impacts. The 35% figure is also a projection for how the year will end after the industry’s bounce back from its April nadir. 

"We have seen improvements throughout the remainder of the year, so the number is definitely going to land somewhere between 30% and 40%, so 35% was an easy middle point," said Craddick’s Director of Public Affairs Mia Hutchens. 

Certain indicators are already showing the sector’s recovery. The Texas rig count has shown a slight uptick since October corresponding with an improving global demand for oil and natural gas. After nearly 60,000 oil workers lost their jobs between February and August, around 2,100 jobs were added in September and October, according to the Texas Independent Producers and Royalty Owners Association. The association also projects that, by year's end, the industry will be supporting at least 300,000 direct jobs and 2.1 million indirect jobs in Texas.

The 35% projection was calculated using data from the Texas comptrollers office, the Texas Pipeline Association and the Texas Oil and Gas Association, the sector’s largest industry group in the state, according to Hutchens. 

At the beginning of 2020, before COVID-19 had reached all corners of the globe, the Texas Oil and Gas Association pegged the industry’s share of Texas’ gross state product at 30.5%. According to a spokesperson, the trade group determined that number by finding the sum of the industry’s direct contributions to Texas’ gross state product — $223.1 billion, or about 13.5% of the state economy. 

Then, to capture the industry’s indirect and induced "ripple" effects, the Oil and Gas Association multiplied the industry’s direct gross state product by 2.3, meaning that every dollar spent in the industry was modeled to generate $2.30 in spin-off economic activity. This multiplier produces an estimated $502.6 billion of economic impact in the state, or 30.5% of the private sector’s gross state product.

To Karr Ingham, a petroleum economist with the Texas Alliance of Energy Producers, the association's method of calculation using a multiplier of 2.3 is "pretty close to correct."

Featured Fact-check

X posts

stated on November 5, 2024 in a post

Pacific Gas & Electric Co. deliberately shut off power “on Republican voters” in California on Election Day.

"That’s not high. If anything that could be a touch low," Ingham said. "I’ve heard commissioners in the past and other political types and other industry cheerleaders say the multiplier for oil and gas is 7."

Before the pandemic, Texas producers were coming off a couple of down years in 2018 and 2019.

In 2018, about four years after the global oil prices collapsed and slammed the brakes on Texas’ fracking boom, the industry was hampered by a credit crunch as lackluster oil prices remained volatile. By mid-2019, oil jobs were in decline as companies struggled to provide steady income and growth.

"It’s been the worst-performing sector on the S&P for the last couple years," said Bill Gilmer, director of the Institute for Regional Forecasting at the University of Houston. "If you take the value of all the producers and add them together, by 2019 they collectively were worth less than Apple."

According to Gilmer, there are "at least three tough quarters in front of us" before the industry will begin to reassert itself and shake off lasting effects of the pandemic. 

"By the time we get to 2022 — and it will take that long for us to feel really good about the economy — oil and the U.S. economy will be back," Gilmer said.

Craddick’s 35% figure reflects the commissioner’s belief that the industry will begin next year stronger than it began 2020. Although several indicators point to an upward trajectory of the industry — like oil prices, jobs, and rig count — Karr said the 35% projection may be slightly optimistic. 

"It’s a little hard to take issue with [Craddick’s number] just because it’s guesswork," Karr said.

Craddick said earlier this month that the oil and gas industry comprises 35% of the Texas economy. Craddick's office clarified that this figure represented the industry’s combined direct, indirect and induced economic impact, and that it represents a projection of how the industry will end the year after its recent bounce back. 

The oil and gas industry has comprised as much as 40% of the state economy during the last decade’s fracking boom, yet shrunk to 30% before the pandemic shocked the world economy. Firm quarterly data showing the industry’s recent gains will not be released by the Bureau of Economic Analysis until late 2021.

We rate this claim Mostly True.