Will States Squander Their Energy Windfall?
Back in the mid-1980s bumper stickers appeared throughout Texas which captured the desperation of the times. "Please Lord," the stickers read, "Give Me One More Boom-This Time I Promise Not to Throw It Away." The wry stickers were a reference to the economic crash that Texas experienced after oil prices plunged from a high of $40 a barrel down to about $9.
It's worth recalling those days as states like Texas, North Dakota and even Pennsylvania and West Virginia experience yet another economic windfall thanks to new technologies that have allowed energy companies to unlock gas and oil reserves previously though unreachable. The boom has helped energy-rich regions add hundreds of thousands of jobs and filled government coffers with unexpected tax revenues.
But the frenzy of economic activity linked to energy exploration will inevitably end. Indeed, the bubble seems just about to burst in natural gas as growing supplies restrain prices and prompt producers to put the lid on some production. The crucial question for regions that soared thanks to the boom is whether they land hard or soft, whether they used the resources from the boon to prepare for an economy beyond the volatile energy sector.
Texas fell hard in the 1980s, though it didn't completely waste the wealth generated by oil. Production in the state peaked at nearly 3.5 million barrels a day in 1972 and stayed high as oil prices soared in the 1970s. But the sharp decline in prices starting in 1986 produced a bust. The oil industry lost nearly quarter of a million jobs in Texas as production plunged.
There was plenty of carnage. Housing prices in places like Houston declined 30 percent, foreclosures in Austin soared to 3,000 a month, hundreds of banks failed. State government, which got nearly 30 percent of its revenues from the energy sector, grappled with a $5 billion budget deficit.
Despite those bumper stickers, it wasn't all for naught. Texas invested heavily in its higher education system during the boom. Indeed, at one point in the early 1980s the University of Texas had the largest endowment in the land, having surpassed Harvard's. The system used that money to attract a world-class faculty, and its resources played a big role in Austin being chosen in 1988 by a consortium of 13 computer chip makers as the home for Sematech, a joint American effort to fend off competition in the field from the Japanese. Thousands of research and production jobs followed, as did venture capital, and Austin became a high tech center.
The state's big cities made a leap too. It wouldn't be an exaggeration to say that East and West Coasters saw Houston and Dallas as hick towns in the 1960s and 1970s. But the enormous resources of the energy sector transformed those cities physically. Though there were a fair number of empty glass towers after the bust, Houston in particular began garnering a reputation as a corporate home. Today, some two-dozen members of the Fortune 500 are headquartered there.
One reason Texas was able to recover was because its years of prosperity didn't drastically change the state's small government mentality. Taxes remained relatively low and cities like Houston regulated growth far less than metropolis' like Los Angeles and New York.
Today the state facing the biggest risk from the inevitable energy bust might be North Dakota, with a sparse population and a less diverse economy that Texas. Energy companies have rapidly increased production there so that North Dakota recently surpassed California as the third-largest oil producing state. There's a Gold Rush mentality, with workers streaming into the state and finding no place to live except trailers hauled in as temporary housing. Some towns have increased in population by 50 percent just in the last few years, and governments are racing to build schools and install roads and bridges.
Still, there are signs of a broader transformation. The state's leaders have invested prudently in their university system. They've kept prices low, required top educators to get into the classroom and teach, and upgraded research facilities. One result is that the state system is attracting both more research grants and more out of state students, who now make up more than half the 14,000-student system. State officials credit college students who stay after graduation, in a state with a 1.5 percent unemployment rate, with helping to boost population growth.
North Dakota officials are also cautious about their own energy boom because the state was burned somewhat by the same bust that hit Texas in the 1980s. Back then governments had rushed in North Dakota to build housing, only to get stuck with empty units and big debt payments when oil prices sunk. This time around local governments are relying on oil producers who need workers to supply the housing.
Some enthusiasts argue that this time it's different, that new technologies which are unlocking American energy resources have shifted the balance of energy power back to North America. The last big bust occurred as the balance of power had moved in the other direction, toward the Middle East.
We haven't yet repealed the laws of supply and demand, however, and the welcomed revival of America's energy sector also includes a fair amount of froth along with real substance. How well regions respond to their good fortunes will dictate whether in a few years we see a return of those bumper stickers lamenting a boom that was wasted.
