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Texas hunkers down for another oil bust

It's easy to see what Texas is bracing for: another oil bust.

But there are early signs the latest crash in crude may not inflict as much damage on Texas as past energy downturns, especially in parts of the Lone Star State that have diversified away from energy-related goods and services.

After California, Texas is the largest economy in the U.S. At nearly $1.5 trillion in gross state product last year, Texas produced more goods and services than South Korea or Australia.

Workers bag pinto beans at the Weststar Foods Co. LLC facility at the Port Of Corpus Christi in Corpus Christi, Texas.
Eddie Seals | Bloomberg | Getty Images
Workers bag pinto beans at the Weststar Foods Co. LLC facility at the Port Of Corpus Christi in Corpus Christi, Texas.

This year's crash in crude prices hit the oil producing state hard, and a continued global supply glut will likely weigh on Texas and the rest of the U.S. oil patch next year.

When oil prices began the latest historic pullback — from over $100 a barrel in July 2014 to less than $35 a barrel this week — Texas braced for another one of the painful economic recessions that have periodically swept through the state since the Lucas gusher on Spindletop Hill in 1901 gave rise to the modern Texas oil industry.

In some ways, the Texas oil industry today is a victim of its own success. After a steady output decline in the 1980s and '90s, U.S. oil producers staged a remarkable and widely unexpected revival over the past decade by deploying new seismic and drilling technologies. By coaxing drill bits to move horizontally, and breaking up "tight" oil formations with fracking, millions of barrels of oil have been produced from decades-old fields once left for dead.

The result was a flood of oil on world markets that has sent prices plunging to less than a third of 2014 peak levels. While major Mideast oil producers like Saudi Arabia could once be counted on to curb their production to keep supplies tight and prices high, foreign oil producers today are heavily reliant on oil profits and show no signs of slowing output. As global stockpiles continue to build, there's little sign that prices are headed back up anytime soon.

That's brought a drop in rig counts — and a rise in layoffs — across most energy-producing regions in the U.S. In Texas, the cuts have slammed the brakes on the state's economy. Real gross state product fell from 4.8 percent in the first quarter of this year to just 0.5 percent in the second quarter, the latest data available.

Like other major energy producing states, Texas is also feeling the pinch from a steep drop in so-called severance taxes — which are based on the value of oil, gas and other raw materials produced in the state. Those revenues paid for roughly $6 billion in state spending in 2013 (the latest data available) — or about 10 cents for every dollar of state revenue.

Just like the location of pockets of oil and gas underground, the rewards of the latest Texas oil boom weren't spread evenly across the state. Wages rose sharply in oil producing cities like Midland, where the jobless rate is still well below the national average. But wages have fallen elsewhere in the state, and jobless rates are rising above the 5.0 percent national average.

The Houston metro area has seen four months of net job losses so far this year, according to economists at Comerica Bank, while the Dallas/Fort Worth area has seen just two months of job losses.

The energy downturn has also hurt the northern part of the state, but "its economic diversity is paying dividends," Comerica wrote in a recent research report. Defense contractor Lockheed Martin, which has a large manufacturing facility in Dallas, recently won a $1 billion contract to build military airplanes. North Texas also continues to attract out-of-state companies, helping to fuel ongoing growth in commercial and residential real estate construction, the researchers added.

That economic diversity may help Texas avoid the kind of painful recessions of the past, when the state was more heavily reliant on oil and gas production. While the economy slowed sharply, there are signs it may be finding a footing. A local economic index developed by Comerica bumped up slightly in September, after steadily declining since October 2014.

"Labor and housing indicators have mostly remained resilient at the state level," said Robert Dye, Comerica's chief economist. "This month's gain does not represent a sea change for the state economy, but does show the strength of the state's economic diversity."

But the state's jobless rate continued to tick higher last month — up two-tenths percent to 4.6 percent — as the energy industry continues to cut jobs, but still below the U.S. rate of 5 percent.

With oil prices expected to remain low for the foreseeable future, a lot depends on how long oil producers can hang on and wait out the financial storm. Many producers are currently losing money at current prices and are hoping to stay in business until production becomes profitable again.

But with many of those producers already heavily in debt, not all of them are expected to survive. That consolidation will remain a continued economic headwind for the state in 2016.

(CORRECTION: An earlier version of this story included a data visualization that misstated the BLS Metro Level Labor Force.)