Oil Prices and the Texas Economy: a crude measure of success?

On Thursday March 25th, Texas House Representative Mark Strama addressed Professor Webber’s ETP class. In discussing the role that Texas plays in the United States’ energy policy, he stated that there was a strong positive correlation between the price of oil and the strength of the Texas economy.  In the spirit of the Austin-American Statesman’s recent column ‘Politifact Texas’, which measures politicians’ statements using a “Truth-O-Meter”, I decided to research Representative Strama’s claim about the Texas economy and oil prices.

The chart attached to this post compares the fluctuations in price of a barrel of West Texas Intermediate crude with the unemployment percentage rate in Texas since January of 1976. West Texas Intermediate is the light sweet crude barrel benchmark that is used in the NYMEX pricing of oil futures contracts. Although there are many measures of Texas’s economic performance, the unemployment rate seems the most relevant to Representative Strama’s discussion as an egalitarian measure of the strength of the economy. An unemployed person cannot contribute income tax and is a consumer of welfare dollars. I gathered data from reputable sources and plotted the two variables on a month-by-month basis.

WTI and Texas Unemployment correlation 

Before I compiled the chart comparing the two variables over time I expected that they would be roughly mirror images of each other (a high oil price gives rise to a low unemployment rate) in the context of Representative Strama’s comments. However, the chart did not stack up with this expectation. The main features of the chart are the volatility in oil prices, with a low of near $12 a barrel in the late 1990’s followed by a general rise in oil prices, culminating in the $147 peak of summer 2008. There are also several ‘spikes’ in Texas unemployment rate in 1982, 1986, 2001 and 2008. There are many periods in which a declining oil price coincides with a declining trend in unemployment, and in the early 1980’s the high oil price ran alongside periods of increasing job losses for Texas.

To enrich the chart, I added markers showing the U.S. recessions (source: FRED, the St. Louis Fed database) . When these were added, the timing of Texas’s unemployment periods became clearer. In all instances where there was a general U.S. recession, Texas unemployment rose, in some cases dramatically e.g. in 2001 and 2008-9. Although this is an unremarkable finding, it indicates that the Texas economy is not as ‘decoupled’ from the Union as supporters of Texas secession might have you believe.

Ultimately, I believe that Representative Strama over-simplifies the relationship between oil prices and the Texas economy. Texas has come a long way since the Spindletop gusher of 1900, and it has a diversified economy with strong technology, retail, aerospace and healthcare sectors. Many of these sectors are adversely affected by high oil prices due to the increased transportation costs it brings or the increased manufacturing costs associated with petroleum-based raw materials. The factors behind the latest economic recession that has affected millions of Texans are less to do with a collapse in oil prices as they are general economic instability caused by the implosion of the banking sector which caused trillions of dollars of paper losses and a corresponding loss in investor and consumer confidence. On the basis of my research, I rate Representative Strama’s comments as “Barely True”, although I would be interested to see if any readers can support his viewpoint through their own research.

Sources:

West Texas Intermediate spot price from Wall Street Journal, Dow Jones and Company.

Texas unemployment data from Texas Labor Market Information, Texas Workforce Commission.

U.S. recession data from FRED, St. Louis Federal Reserve Database.

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3 Comments

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3 responses to “Oil Prices and the Texas Economy: a crude measure of success?

  1. vinnydjerseyshore

    Interesting analysis, I am glad you were able to put some figures to the Representative Strama’s statements. The one thing that struck me about his discussion was the fact he does not think that America’s recent problems were caused by greed or excess, rather it was because of $4 gas. He also does not feel that Americans need to change our habits; rather we need to develop technology that will suit our needs. Overall, one must keep in mind that Representative Strama represents a district with virtually no oil and gas resources and what he feels is good for the State of Texas is really good for the constituents in his district and may not be best for everyone in Texas.

    • gatorgreg

      vinnydjerseyshore,

      I would disagree that he claimed $4 gas was the reason for the US recession. He merely said it broke the camel’s back. It was a burdened society before $4 gas but that pushed the market into free-fall. Basically it was teetering and the $4 gas was the catalyst that allowed the reaction to occur but was not the cause that put us on the precipice.

      Author,
      Thank you for this analysis. I would agree they may not be as coupled as he would have us believe but more analysis needs to be performed to determine the effect of oil shocks in either direction. For instance, oil companies cannot react on a day-to-day basis regarding oil price. They must look long term so a short spike may or may not affect employment. There most likely is a delay effect of whether oil will continue to stay high or continue to stay low. Some sort of normalization with regard to the price drop and a corresponding lag time might be interesting.

      Of course other measures may also be examined but I think unemployment is a fair choice if you are only choosing one metric.

  2. I would suggest that “stabilized” the Texas economy perhaps would have been a better word. or “insulated” the Texas economy.

    As a home buyer I have been watching Texas home prices over the last year and they have not seen the violent drops of Arizona and Florida.

    Since the home is the average Americans largest single purchase, it would be interesting to take a look at the real estate numbers on your chart.

    Great job on the blog
    http://www.About.me/BrianHill

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