This opinion piece was first published in the Jan. 10, 2009, edition of The Houston Chronicle. Kathleen B. Cooper is a senior fellow at the Tower Center for Political Studies at Southern Methodist University, where she contributes to the Center’s mission of public policy education and collaborates with colleagues within the Center and across the University.
January 12, 2009
By KATHLEEN B. COOPER
Kathleen B. Cooper
Texas was shielded from the worst of the housing bubble and earliest pangs of national recession by the extraordinary path of energy prices since 2005. Energy companies accessed their exceptional cash flow levels to keep projects flowing and provided impetus for related investment. Now that oil and natural gas prices have fallen to only one third of their July level, however, what should we expect for Texas and other energy-rich states? I fear the news is not good.
Market analysts expect energy prices to rebound in fairly short order, but that would require a quick turnaround in the world economy — an unlikely outcome despite stimulus being provided worldwide.
These same market participants ignored a weakening U.S. economy beginning late last year and focused instead on the rapid growth in China, India and other emerging markets — believing falsely that these economies would behave differently in this cycle, indeed that they were somehow decoupled from the U.S. economy.
The U.S. recession likely will end around mid-year 2009, as will Europe's, but the emerging markets only recently sank into recession and are unlikely to strengthen until considerably later. The key to future energy demand and pricing is world economic growth, which will not begin in earnest until 2010.
The market's false conclusions about a "decoupled world economy" contributed mightily to the bubble in energy and other commodity prices over the past year. Oil prices — like stock prices — are driven as much by perceptions of demand and supply as by reality now that oil contracts trade openly on exchanges.
Indeed, today's commodity price developments bear a striking resemblance to the boom-bust shortage mentality era of the late 1970s. One of the lessons learned by oil-producing countries in that era was that it is dangerous to overprice one's bread-and-butter product for so long or to the extent that viable alternatives can be developed. While most OPEC countries seem to have forgotten that lesson, Saudi leadership demonstrated better memories by initiating earlier this year a substantial, long-term expansion of its crude capacity.
The ultimate outcome of that earlier boom-bust mentality was a severe global downturn and commodity price collapse — much like today. To be sure, there are differences in the environment: Today's difficulties are driven more by a global credit crunch following years of free-flowing credit rather than the need to stop high and accelerating inflation. But the result appears to be the same with regard to significant economic and price effects.
Indeed, world oil demand fell modestly in 2008 and is expected to fall sharply in 2009, which would mark this period as the first time in three decades that consumption declined for two consecutive years. Sluggish world growth throughout 2009 will keep energy and other commodity prices at these lower levels over the next year — causing serious problems for some as they unwind leveraged investments made during the boom. Households and small non-energy businesses will be aided by these lower prices, but job growth will be negatively affected in energy-related businesses in Texas and throughout the nation.
OPEC has recently announced planned cuts of 2.2 million barrels daily to stem the price decline, but the organization has a poor record of implementing cuts when world demand is stable or shrinking. Adam Sieminski, a seasoned energy specialist, recently put that record into perspective: In both 1998, the year of the Asian financial crisis, and in 2001, the last year the U.S. slipped into recession, OPEC was unable to stop prices from falling despite production cuts of 4.5 to 5 million barrels daily.
The Texas economy is less dependent upon energy revenues now than during our trials in the 1980s. But our out-performance of the U.S. economy since 2005 mirrors exactly the period of higher-than-normal energy prices. While the state has myriad strengths and considerable diversity, investments undertaken in our region over the past couple of years with a view toward ever-higher energy prices will have difficulty meeting earnings expectations. We and our neighboring energy-rich states would do well to prepare for sterner days ahead relative to the nation as a whole.
Cooper is senior fellow at SMU's Tower Center for Political Studies, the former chief economist of ExxonMobil Corp. and undersecretary of commerce for economic affairs from 2001 to 2005.
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