Oil is in a slump and, on its face, that’s a good thing for you and me. Low gas prices mean embracing the fuel extravagances of yesteryear, like leaving your car idling in the parking all night so it’s warm when you drive to class in the morning, or playfully splashing your friends with gasoline at the pump in front of the 7-11. However, there are two sides to every coin, and low prices on crude oil could mean problems for the upcoming state budget with very real implications for UT.
Oil and gas are a huge component of the Texas economy. Although the oil and gas sector accounts for less than 3 percent of Texas jobs, it drives around 11 percent of our economic output. The last major oil bust in the late 1980s demonstrated the devastating effect of cratering commodities on the broader economy when over 700 banks and thrifts failed, according to the Wall Street Journal. Although it’s unlikely we’ll see a repeat of that disaster, many of the same macroeconomic forces behind the bust are at play now. Expansion of oil exploration in West Texas and North Dakota’s Bakken formation have increased domestic supply while internationally a weakened OPEC has done little to reduce production lest they sacrifice their own market share. Abroad, tempered global growth and increased fuel efficiency has decreased demand. All of these factors converge to create the low prices that we see today and are creating a headache for not only oil companies, but also the state legislators who rely heavily on energy price projections to write their budget.
The unfortunate elected official whose most impactful decision will be guessing what oil prices will be over a particularly volatile period is Glenn Hegar, our newly sworn-in comptroller. His office’s Biennial Revenue Estimate has to include a baseline guess of how much money will be available to the state for spending over the next legislative period. Although a barrel of West Texas intermediate crude oil has plummeted from over $100 in May to less than $50 as of this writing, Hegar has projected prices to rise back up to between $65 and $70 on average over the biennium. This means reduced state revenue in the form of taxes on energy and the firms that produce it. This isn’t to say that Texas is expected to economically stagnate in coming years. The Dallas Fed recently predicted that the state economy will continue to grow by 2 to 2.5 percent, less than in recent years and not quite high enough to continue heralding the “Texas miracle.”
If state legislators decide to reduce higher education funding due to strain from reduced energy revenues, this could lead to a bigger tuition bill for students, just as happened in the 2012-2013 biennium when former Comptroller Susan Combs underestimated state revenue. In addition to relying on tax money to pay for the portion of the higher education budget covered by the Legislature, the state’s Permanent University Fund is an endowment contributing to the support of schools in the University of Texas andTexas A&M University Systems, as provided by the state’s 1876 Constitution. The fund’s assets include billions in financial assets as well as 2.1 million acres of land (and mineral rights) located primarily in West Texas.
Falling oil prices and decreasing returns from the West Texas oil wells could squeeze the Systems aswell as other areas of state government that rely on expensive black gold. Some politicians are already having to cope with the reality that low oil prices mean underdelivering on the important tax-cutting promises that won them their seats. Incoming Lieutenant Governor Dan Patrick had been cheering on the campaign trail that school property tax cuts could be made a reality, but massive moves like that would require much more money this session to be feasible.
Like a fan’s relationship with Longhorn football, our relationship as students with low gas prices is complicated. Any benefit we get at the pump also has very real implications about how much we have to pay for school. Maybe the Board of Regents will decide in the future that tuition will go up again. In the meantime take advantage of the good prices and finally take that road trip to Marfa you’ve been putting off so long.
Matula is a finance senior from Austin.