Oil Dropped to $63 a Barrel Monday, What Does That Mean?

By the close of business Monday, a barrel of West Texas Intermediate crude oil, the U.S. benchmark, dropped another 4 percent. Since July the price of oil is down 40 percent, which seems like it could be a disaster for Texas, given the portion of the state economy based on energy production.

"If you were to look at oil and gas activity as a percent of [Texas'] output, I'm not talking about the absolute level, I'm talking about relative to the state's economy, it's three times greater today than it was a decade ago," says Bud Weinstein, the associate director of the Maguire Energy Institute at SMU.

Producing all that energy requires energy, he says, which is what makes the effect of diving oil prices on the Texas economy a complicated question to answer.

Because producing oil through fracking is so reliable compared to wildcatting, it will take a much lower price per barrel to endanger the boomtowns and major oil companies that dot the Texas map. There are fewer "dry holes," Weinstein says, so production can sustained at lower prices.

"If prices go down to $40 dollars, and lots of people have been talking about $40 oil, that's a different scenario," Weinstein says. "At least for Texas the costs would outweigh the benefits [at $40 a barrel] because there are probably a million people in this state whose livelihoods depend on what happens in the oil and gas industry."

Until then, the low prices are good for the state. Auto sales will go up, as will holiday shopping numbers. Texans will have more disposable income in general, Weinstein says.

"On balance, if we're talking about $60 oil, it's probably a plus for the state. There would be some modest retrenchment in drilling activity and there would be some layoffs and consolidations, but at $60-$65 most of these shale plays in South Texas and the Permian Basin will keep producing," he says.

At $40, the consequences would be felt around the state, he says, but would hit places like Midland, Goliad and Abilene the hardest. As far as big cities go, Houston would be the hardest hit, Weinstein said.

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