OPEC has declared war on Texas. As to not lose market share to the American fracking boom, primarily located in Texas and the Dakotas, Saudi Arabia has inundated the U.S. with cheap oil. The intention is to push U.S. producers out of the market space; so while low gas prices are great for the overall U.S. economy, there is a downside to the local economy.
Fracking is the process of blasting water, sand, and other chemicals deep into the ground the bring up oil and gas and it has allowed efficient, cost-efficient oil extraction in North America. The process has caused the U.S. economy to prosper while transforming Texas into an energy powerhouse; earlier this year, the Lone Star State was projected to produce 3.4 million barrels of oil by the end of 2014. If this threshold is met, Texas alone would likely outproduce every OPEC nation except for Saudi Arabia, the world’s cheapest oil producer.
While technological advances like fracking have allowed U.S. producers to grow, they have also posed significant threats to the Saudis.
To combat the competition and push Texas upstarts out of the market space, Saudi Arabia has begun flooding the market with cheap oil.
This tactic appears to be effective. The Dallas Morning News reported that the Saudis recently wiped “hundreds of billions of dollars in equity value from the market capitalization of U.S.-traded securities.”
Saudi Arabia is able to produce oil for around $20 per barrel, and then sell it around the world for a significant profit. For the past 10 years, global consumers have paid around $100 per barrel for oil. The nation’s “entire society is built around this price gap,” the Morning News reported. In order to hurt U.S. oil producers and force them out of the market, the Saudis have recently began selling their barrels at a lower price.
Saudi Arabia similarly flooded the oil market in the mid-1980’s and the effect was devastating on U.S. oil production. Texas, where much domestic production occurred, was hit particularly hard.
This time around, however, the Texas economy is likely to weather the slump in oil prices.
Given that the current domestic energy explosion is technology-driven, it could help cushion Texas from a 1980’s-type bust. Fracking technology is expensive, but the technique has allowed producers to become partially resilient to fluctuations in oil prices, according to USA Today. If oil prices continue to drop, it will likely only impact new drilling — not wells that already exist.
Diversification in the Texas economy has also helped prevent economic depression.
In recent years, Texas’ economy has expanded far beyond oil and gas. “Even though the oil industry and gas has been thriving in recent years, the Texas economy is no longer dependent on it for ups and downs,” gas and oil economist Karr Ingham told Breitbart Texas. “The oil and gas industry has not gotten smaller–rather, the overall Texas economy has gotten bigger. The state economy is now a powerhouse.”
Texas has become a leader in the industrial, technology, and manufacturing industries — just to name a few.
The “Texas Model” of low taxes and reasonable regulation continue to draw businesses of all sorts to the state. These factors could protect the economy in Texas — and the U.S. — from suffering, as Saudi Arabia continues to play hardball.
Follow Kristin on Twitter @KristinBTate.