Texas’ economy already hit by virus
The coronavirus may or may not trigger a global recession and slow the U.S. economy, but one thing is certain: We already are feeling the impact in Texas.
The world’s main stock indexes have dropped 8 percent from recent highs. Investors are worried that as the virus spreads to more countries and more governments impose quarantines, global economic growth will slow and hurt corporations.
In Texas, though, we already are experiencing slower economic growth due to lower oil and natural gas prices. At the beginning of the year, the price for a barrel of West Texas Intermediate crude hit $64.45. Over the past few days, WTI has, at times, dropped below $47.
Demand for crude dropped when China shut down much of its economy to stop the spread of COVID-19, a fast-spreading and unusually deadly coronavirus. When factories do not operate, planes do not fly, and workers do
When factories do not operate, planes do not fly and workers do not commute in the world’s second-largest economy, the globe becomes awash in oil.
not commute in the world’s second-largest economy, the globe becomes awash in oil.
Investment bank Goldman Sachs said it no longer expects oil demand to grow by 1.2 million barrels in 2020 and has revised its forecast growth to only 600,000 barrels. If the economic slowdown persists, that number could drop lower.
Oil companies producing in the Permian Basin do not make money at $55, let alone $46.24. Many of these companies barely survived $60 oil by relying on high-interest loans and hope that Saudi Arabia, Russia and other foreign powers eventually would cut production and drive up prices.
Hope is not a plan, as they say, and investors are bailing out of the oil patch. Most notably, they are selling the high-yield, highrisk bonds many Texas operators rely on for financing, sending the cost of borrowed money skyrocketing, according to the Financial Times.
Low oil prices and high costs of capital force executives to
slash spending. Olivier Le Peuch, CEO of the world’s largest oil field services firm Schlumberger, told the Reuters news agency that he expects a dramatic reduction in new shale oil drilling.
Fewer rigs and slower growth means fewer Texas jobs. The industry employs the most people during the planning and drilling of wells. Once they are flowing, they require comparatively little labor.
Almost all of Texas’ economic outperformance is attributable to the oil and gas industry; a bust will put us on par with the national economy at best. If COVID-19 takes hold in the United States and slows the national economy, it will have an outsize impact on Texas.
The federal government is trying to encourage people, businesses and institutions to prepare for the arrival of COVID-19 while also discouraging panic. Because if Americans freak out, a recession is certain.
President Donald Trump went on television Wednesday to contradict Centers for Disease Control and Prevention officials who warned that the virus will inevitably spread in the United States.
“I don’t think it’s inevitable,” Trump said. “We’re ready for it. We’re really prepared.”
Trump and others like to point out that more than 34,000 Americans died last season from influenza as a way to put COVID-19’s impact in perspective. But there is a reason why China shut down its economy: The coronavirus could kill twice as many if it became commonplace. The U.S. government would not spend billions and risk the economy if there were not a significant threat.
Mitigating the spread of the virus is simple. At the City of the Future conference in San Antonio, participants stopped shaking hands and opted instead for fist bumps. Experts urge us to wash our hands regularly, cover our mouth when we cough or sneeze, and for goodness’ sake, stay home if you fall ill.
Protecting the economy is more difficult. U.S. strength is almost completely reliant on consumer confidence and spending. Manufacturing has slowed, and corporate earnings have shrunk over the past year. If Americans suddenly anticipate trouble ahead, they will stop spending and end economic growth.
Economists at IHS Markit, a data analysis and consulting firm, estimate COVID-19 has already shaved 0.1 percent off global economic growth for 2020. But if China does not contain the outbreak, and other nations are forced to impose quarantines, the effect will be far greater.
If the U.S. government ordered any significant group of Americans to stay home and to avoid crowded places, such as airplanes, trains or offices, then the national economy would stall, and oil demand would go bust.
COVID-19 is revealing how interconnected and interdependent our world has become. Just as our shared physical vulnerability allows the virus to spread despite artificial borders, our shared economy means we cannot isolate the financial consequences. We are truly all in this together.
Tomlinson writes commentary about business, economics and policy. twitter.com/cltomlinson chris.tomlinson@chron.com