By some measures, Texas’s economy is a microcosm of America’s. But over the last year, the Texas economy has been growing twice as fast as the national economy that it is an integral part of.

Although Texas has a burgeoning technology sector (it’s the home of AT&T, Inc. [T], Dell Incorporated, and Texas Instruments, Inc. [TI], among dozens of other technology companies), the state is famous for one industry above all others—energy, particularly petroleum. Despite North Dakota and Alaska’s diligent efforts, Texas remains by far the nation’s largest producer of crude oil, producing triple the volume of North Dakota. But the Lone Star State does more than just drill. It is also the undisputed national headquarters for refining, storing, transporting, and marketing oil and all the products that derive from it. Most of the natural gas refining and almost half the oil refining in the United States is done on Texas’s Gulf Coast. In fact, refining methods in Texas are so advanced that even shipments of heavy crude oil from other nations get refined on the Gulf Coast, without ever being sold in the United States.

Texas has prided itself on how its robust oil and gas industry rendered the state immune to the early 21st century recession that plagued the other states to varying degrees. Unemployment in Texas was low and tax receipts high, which is still the case. This is partially due to circumstance, partially to design. The extractive industries are the only ones that pay a “severance tax” to the state. That tax is almost entirely responsible for funding Texas’s rainy day fund, which is currently at its highest balance in history.

Over the decades, oil’s fluctuating prices have made Texas susceptible to booms and busts. The price of a barrel of West Texas intermediate (WTI) crude oil has halved over the past eight months, from $105 a barrel to $53 and dropping. However, production has risen correspondingly. Multiply price by quantity, and the result is that tax receipts on oil and gas production have decreased a mere .2% from a year ago. While it is a downward trend, it is not yet a significant one.

Of course, to measure the state’s entire production, we must include subterranean rig operations within the Gulf of Mexico itself. As offshore production requires rigs, counting the rigs gives us at least an indirect snapshot of where the industry is heading. The total of oil rigs in the state and surrounding waters has fallen from over 900 to the mid-850s in recent month. As recently as 2009, when WTI oil had fallen to $39 a barrel from a peak of $134 eight months earlier, a mere 329 rigs were in operation. One recent report claims that the break-even price for oil production in Texas is $50 a barrel, meaning that volume would have to increase by a lot to generate the same profits.

As for oil’s most tangible benefits to the economy, petroleum jobs pay much more in constant dollars than they did during the last Texas boom in the 1980s. Even though the state’s economy has broadened into multiple sectors since then, and a smaller proportion of Texans now work in the petroleum industry, the jobs that remain are plenty and plenty remunerative.

According to the Texas Oil & Gas Association, the industry’s trade organization, 370,000 Texans are directly employed in the oil and gas industry. Their annual salary, including everyone from engineers to machinists to wholesalers, averages over $119,000. That’s twice the average of what competing industries pay, in a state with a gigantic workforce. (Meaning that the larger the workforce [i.e., the greater the sample size], the stronger the likelihood that salaries across various industries would normalize. Yet oil salaries stay far above average in a state with 27 million people.) 

All this economic activity happens in one of the seven states that levies no income tax. Not only that, but Texas law also forbids sub-state entities (counties, towns) from taxing personal income. The state derives most of its revenue through a 6¼% sales tax, along with the severance tax that’s exclusive to the state’s most important industry.

Texas famously houses the headquarters of some of the largest energy corporations on Earth. They include many companies directly involved in producing and delivering energy (ExxonMobil [XOM], ConocoPhillips Co. [COP], Valero Energy Corporation [VLO] and Marathon Oil Corporation [MRO]), and some comparably important secondary companies that serve the primary energy companies (Enterprise Products Partners L.P. [EPD], National Oilwell Varco [NOV]).

The Bottom Line

Despite recent and persistent calls to diversify the economy, Texas manages to maintain its vitality by catering to a world whose thirst for hydrocarbons is nowhere near sated. With the internal combustion engine still the automotive power source of choice for billions around the world, Texas’s status as one of the largest purveyors of petroleum will continue.

 

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