RELATED ARTICLES "Texas Update and Outlook," Southwest Economy, Jan./Feb. 1999 (Text or PDF) "Changing Texas Economy: Dynamics of the Free Market," In Depth, December 1998 (PDF) "Slower Growth in Houston in 1999," Houston Business, January 1999 (Text or PDF)

Regional Economy
The New Texas Economy

Dallas Fed Economists Lori L. Taylor, Stephen P. A. Brown, Fiona D. Sigalla and Mine K. Yücel discuss the changing influence of oil prices on the Texas economy.

The 1990s have been eventful for the Border Region (Chart A). The last time nominal oil prices hit $11 per barrel—in 1986—the Texas economy fell off a cliff. This time the economy is likely to do little more than stumble.

Chart A illustrates the strong correlation between oil prices and the Texas economy during the 1980s. The figure plots inflation-adjusted oil prices and deviations from trend employment. Deviations from trend employment indicate the extent to which the actual level of employment differs from the level one would have expected if the economy were growing at its long-term trend rate of growth (3.3 percent per year). When the deviations are rising (as was the case during the boom), employment is growing faster than trend. When the deviations are falling (as was the case during the bust), employment is growing more slowly than trend. A horizontal line indicates that employment is growing at trend.

If we assume that the influence of oil prices has remained unchanged and remove it from the picture, we can see a fairly strong, historical correlation between Texas and U.S. employment (Chart B). However, the relationship seems to have broken down recently. Controlling for the negative influence of falling oil prices, Texas was well above its long-term trend in 1998, while the United States was not. In other words, the Texas economy is doing much better than would be predicted on the basis of its historical relationships with oil prices and the U.S. economy. This evidence implies that either Texas’ economic relationship with the United States has changed or the economic influence of oil prices has changed.

Work by Dallas Fed economists Stephen Brown and Mine Yücel suggests that the economic influence of oil prices has changed. Although Texas is still hurt by falling oil prices, Brown and Yücel estimate that the state is 75 percent less sensitive to oil price fluctuations today than it was in 1982. In 1982, a 10-percent reduction in oil prices would have reduced total Texas employment by an estimated 1.37 percent when multiplier effects are included. In 1998, the same 10-percent reduction would lower total Texas employment by an estimated 0.36 percent (about 32,000 jobs) including multiplier effects. Even with the slower growth the state experienced in 1998, Texas still added nearly 24,000 jobs per month.

One reason for the declining influence of oil prices is the rising importance of energy consumers to the Texas economy. For example, the airline industry had a very good year in 1998 and would benefit substantially from continued low fuel costs. Three of the nation’s top seven airlines are based in Texas (American, Continental and Southwest).

Although falling energy prices are becoming less influential for Texas as a whole, they are likely to have a substantial influence on the distribution of economic activity in the state. As Chart C illustrates, Mother Nature serves Texas Tea in only some parts of the state; in other parts, energy consumers dominate the economic landscape. For example, in Dallas/Fort Worth, which represents one quarter of economic activity in the state, the transportation industry is much more important than the energy industry. The total employment of Dallas/Fort Worth mining firms approximately equals the local employment at American Airlines alone. Total transportation employment is more than seven times mining employment in Dallas/Fort Worth. Therefore, Dallas/Fort Worth may benefit from lower oil prices, while other parts of the state—such as Houston—will undoubtedly lose.

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