“All economics are local” the saying (almost) goes. Few people’s economic fortunes move in lock step with the United States as a whole, but most feel the push and pull of the local economy. This is where much of the talk about oil has failed. Texas and North Dakota get all the headlines. But other U.S. states will suffer, and possibly much, much more when it comes to falling oil prices.
The vast majority of states do not rely on mining (in GDP reports, “mining” is the accounting line for oil and gas extraction along with more traditional mining activities) to contribute anything significant to their growth. But there are a handful that rely heavily on it. These are the extraction states, and they have been largely overlooked in the discussion of the oil-price bust.
Yes, oil’s decline will hurt Texas. But Texas is a big state with a somewhat-well-diversified manufacturing base and other industries that should cushion the blow. In 2013, only about 14 percent of the economic growth in Texas was directly related to mining. Depending on the multiplier effect, the slowdown should be manageable. With one of the nation’s largest economies, Texas should be able to absorb much of the blow, though certain areas of previous rapid growth will be severely distressed.
The “multiplier effect” is critical for a thorough understanding of how severely the indirect effects of oil money help, or hurt, the broader economy. And there is not a consensus on precisely how much that is. Estimates for the U.S. oil multiplier range from the relatively modest 1.2x to a powerful 2x and can even vary from field to field. It is difficult to be confident in an exact figure, but the takeaway is the same, regardless—there are broader effects on the real economy than simply the exact contribution of mining to the economy. If all the Texas economy needed to overcome was a downturn in oil, the 14 percent growth contribution would only be a small bump. However, if the multiplier turns out to be closer to 2x than 1x, the economics of lower oil become far more interesting.
Even with a high multiplier, Texas will only see about a 1-2 percent headwind in its GDP growth. North Dakota would be far more affected. Of its nearly 10 percent growth rate, 3.6 percent—or 37 percent of its growth—comes from mining. There is no question the decline in oil may bring the North Dakota economy back down to earth. After growing its economy by 20.3 percent in 2012 and 9.7 in 2013, it could use a breather. And a prolonged decline in production and price would herald a severe decline in GDP for the State.
Texas and North Dakota certainly have exposure (both to the oil economy and from the media), but there are states and regions that will feel it much more acutely. Oklahoma relied on “mining” for 59 percent of its growth in 2013—2.5 percent of a 4.2 total. In fact, there is a cluster of states in the Southwest and Rocky Mountain region where mining GDP concentration is highest. New Mexico, Oklahoma, Arkansas, Colorado and Wyoming all had a higher concentration of growth from mining in 2013 than Texas or North Dakota. West Virginia and Alaska are the most exposed on a percentage of growth basis—both are over 100 percent—but Alaska had a negative contribution in 2013 with North Slope difficulties and West Virginia has a significant amount of other types of mining, making it more difficult to parse out the true effect of oil (although, the prices of many of these commodities have fallen in a similar fashion to oil).
Few would suspect that, in terms of economic exposure, Wyoming is one of the most exposed. Much like West Virginia, though, Wyoming has a significant coal industry, and this may blur the view of oils potential effects. In 2013, Wyoming had what is best described as an economic resurgence. It posted the second-highest growth rate of any state and pivoted from a 2.8 percent decline in 2012 to a 7.6 growth rate in 2013. With 81 percent of the growth from mining, the concentration is extreme. Production of crude oil increased 20 percent from 2012, and Wyoming—though relatively meaningless in terms of overall U.S. growth—was making a comeback.
But now, growth is uncertain. Beyond the mining line, economic growth is stagnant, and this is true for many of the U.S. oil states. Colorado, now known for making marijuana legal, relied on mining for 43 percent of its growth in 2013. For New Mexico, 50 percent of its meager 1.5 percent growth came from mining. Likewise, in Arkansas, 43 percent of its 2.4 percent growth was from mining. Colorado has fallback options to spark its economy—many other states do not.
The Rocky Mountain region—containing Colorado, Idaho, Montana, Utah and Wyoming—was the fastest growing region of the United States in 2013 at 4.1 percent and relying on mining for 34 percent of it. This growth amounts to around $21.2 billion, a respectable number, but only about 8 percent of U.S. growth. The growth rates these states are posting are the fastest in the nation—aside from Arkansas and New Mexico. Those two states are examples of the unlikely states and regions of the United States that the oil boom was beginning to benefit as it spread to regions of the nation that had been left behind. Interestingly, Pennsylvania, a state often associated with the energy boom, did not receive the boost some may have anticipated in 2013 with only a 0.15 percent growth boost (which was about 20 percent of its 0.7 percent growth—not a great year all around).
Outside of Texas, the size of the economies—and their relation to the overall U.S. economy—is relatively small, and the effect of a significant slowdown in these states would not be felt much in the broader numbers. A flattening out of the Texan economy would take around 0.3 percent (the amount Texas contributed in 2013) from the U.S. economy, depending on the oil multiplier.
For much of the United States, the plunge in oil prices will be a positive, not a negative. But for states that relied heavily on mining for growth, the best times—at least in the near term—are over. North Dakota has been a miracle and Texas is an enigma, but they are not the only two that will be hurt in the oil bust.
Samuel Rines is an economist with Chilton Capital Management in Houston, TX. Follow him on Twitter @samuelrines.