What goes down must come up.

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Oil May Not Mess With Texas

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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I grew up in Texas and many friends and family members still living there.  So I’ll always feel an allegiance to the Lone Star State. That’s one reason I’m worried that the recent plunge in oil prices will devastate the Texas economy, in a replay of the 1980s.

The other reason is that the “Texas Miracle” has been one of the big drivers of the U.S. recovery: until recently, Texas was responsible for all of the net job growth in the country since the start of the Great Recession. Yes, you read that right -- from December 2007 through October 2014, total employment actually went down in the U.S. ex-Texas.

Now the miracle state is in trouble. Texas has been at the vanguard of the shale fracking boom, both because many of the biggest shale plays are located in the state, and because the companies that provide the technology and services for shale extraction are based there. In 2009, Texas was responsible for a quarter of all U.S. oil production; in 2014, thanks to shale, that number had increased to 40 percent.

The collapse in oil prices -- down about half from recent protracted highs -- will be a big problem for Texas’s shale industry. Although many of the Texas shale producer can be profitable even at today's lower prices, many are not. That means there will be much less incentive to drill new wells to replace the ones that run out. Reduced investment means lower economic activity. Meanwhile, oil services companies such as Schlumberger and Halliburton made fortunes providing the technology to other countries to extract hard-to-get oil when oil prices were high. Now that prices are low, their services won't be needed as much.

Energy is only 11 percent of Texas’ economy. But because of multiplier effects, an oil bust can be much larger than that number would suggest. Oil and oil-services jobs tend to be high-paying, and when workers in those industries get fired or take pay cuts, they don’t buy as many goods and services from the local economy. So the pain spreads. That’s why, after oil prices crashed in the 1980s, Texas’ economy was hit so hard.

But during my 18 years growing up in Texas, I learned that the people and institutions of my home state are smart, hard-headed and pragmatic. I believe that Texas will take the necessary steps to make this oil bust less painful than the one in 1986, and to use the opportunity to emerge from the bust with a stronger economy than before.

The 1980s taught Texas the hard lesson that a diversified economy is absolutely essential. In the decade and a half after 1986, Texas’ economy grew by 118 percent, while the mining industry (which includes oil and gas) grew only 18 percent. Even since the shale boom began, Texas has seen much greater employment growth in sectors like professional services and health care than in extractive industries. There is also a substantial high-tech cluster centered in Austin, and Texas actually exports more high-technology goods to other countries than does California. This will limit the inevitable pain of an oil bust.

On a more fundamental level, Texas has a young population, abundant natural resources, low taxes and a friendly regulatory climate. An oil bust doesn’t alter those strengths.

That doesn’t mean Texas couldn’t do even more. An oil bust will be the perfect opportunity for the state to shore up its remaining weaknesses.

One area in which Texas could do better is higher education. Despite being the second most populous U.S. state, Texas has only two universities that make Forbes’ list of the top 100 colleges -- tiny Rice University at No. 32, and the University of Texas at No. 76. California, in comparison, has 10. Only 22 percent of Texans graduate from four-year universities, compared with 35 percent of Californians.

Even as a low-tax state, Texas could afford to spend more to boost the performance of its flagship public universities, the University of Texas and Texas A&M University (disclosure: My father is a professor at Texas A&M). Other public schools, such as the University of North Texas, the University of Houston, and Texas Tech, could also use a boost.

A second way that Texas could improve is by building better cities. Austin, of course, is such a successful case of urban planning that urbanists study it the world over. But Dallas, Houston and other cities have developed in a more haphazard manner, and could benefit from more cooperation between public and private actors to turn them into truly world-class cities. Every leader in Texas would learn something by reading the writings of Pike Powers, the politician-turned-consultant who helped give Austin the vision that eventually turned it into a vibrant industrial cluster.

So although the threat of an oil bust looms, Texas’ leaders shouldn’t hunker down to wait out the siege. They should be implementing the reforms that will fuel the state’s next rise.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net