Oil No Longer Fuels Texas Economic Engine

It's been five decades since Frank Pitts sank his first drill stem into the hills of East Texas. He's the dean of Dallas wildcatters, a man who's mastered one of the world's most volatile businesses.

To Mr. Pitts, nothing compares to the drama that began in 1981, when oil prices hit $31 a barrel. Fortunes were made overnight, he recalls, and the Petroleum Club grew crowded with big cars and big talk. "People were full of enthusiasm," he says. "It was a very happy period."

It was also brief. In 1986, oil prices plummeted and the state's one-track economy nearly collapsed. For many, Pitts says, it was a hard lesson in hubris.

Today, as the oil and gas industry enjoys a renaissance, celebrations across Texas are noticeably muted. The Stetson-topped tycoons Pitts describes have been replaced by engineers armed with spreadsheets and seismic data. Although the reckless thrill of the oil business may be lost forever, most people in Dallas aren't too discouraged. Since the collapse of their oil kingdom 10 years ago, Texans have managed to build something far more imposing: a diverse economy.

"Culturally, the energy industry has always been powerful and important in Texas," says Gary Preuss, an economist with the state comptroller's office. "In practical terms, though, it's really not a big deal anymore. A spike in oil prices does not necessarily bring on a boom."

Indeed, the energy industry is not the economic engine it used to be. Its share of the state's economic output shrank from 26 percent in 1981 to just 10 percent last year. According to Mr. Preuss's projections, that share will sink to about 8 percent by 2019, making the energy business less valuable than the state's retail industry.

Meanwhile, he says, the state's service sector, led by business information and health care companies, now accounts for almost 20 percent of gross state product.

In Dallas and Austin, business leaders point most proudly now to sprawling high-tech manufacturing corridors that have lured well-educated technicians and programmers.

"If you look at the Texas economy as a whole over the last 15 years, we've moved away from being an earth-based economy grounded in mining and oil, to being a knowledge-based economy," says Stephen Brown, senior economist at the Federal Reserve Bank of Dallas. "The industries stimulating growth are on the cutting edge of technology."

Although the Texas economy is still one of the most energy-reliant, Mr. Brown says, it is now about half as sensitive to swings in oil prices than it was in 1982.

The transformation is, by most accounts, irreversible. As other economic sectors grow, the energy business has continued to operate at a bare-bones level. The number of energy jobs has fallen nearly 50 percent since 1980, accounting now for just 4 percent of all Texas employment.

This is remarkable at a time when energy prices are reaching boomworthy levels. Last year, the price of oil rose $6 a barrel to $25, aided by strong demand domestically and in developing nations. Due to tight inventory controls, worldwide supplies are low, and advances in seismic mapping and drilling technology have made producers far more efficient.

Although the number of active oil rigs in Texas rose last year from 239 to 292, and oil extraction in the Gulf of Mexico continues to grow, Texas oil production last year only reached 498 million barrels, slightly more than half the total in 1980.

Even if more crude were pumped, experts say, Texas oil refineries are already operating at near capacity due to out-of-state oil. "The problem," says Allen Mesch, an economist at Southern Methodist University, "is that we haven't built any new refineries in years. If demand increases, we'll have to start looking overseas."

According to Dr. Mesch, the 1986 price crash may have created an environment that precludes new exploration. Large oil companies now operate on tighter margins, he says, and they've grown wary of taking risks. As the number of oil companies continues to shrink, he adds, much of the new demand could go unmet, keeping prices high.

In the new Texas, this could be a problem. According to Preuss, growing energy usage in this diversified economy has pushed Texas closer to the day when it will become a net energy consumer.

Yet by all accounts, the current uptick in energy prices, particularly the strong demand for natural gas, is an overall boon for the Lone Star State. Even though much of the world's growth in oil drilling is happening overseas, Texas is still home to a host of oil firms whose corporate and payroll taxes flow into state coffers.

Nevertheless, observers say, nothing can bring back the romance of the oil and gas business. As many family-owned oil companies proceed to their third generation, fewer young Texans are drawn to a business known for its peaks and valleys.

Frank Pitts has been fortunate. His grandson is involved in his company, and will someday run it. Yet Pitts is well aware that the old days, when wildcatters would decide where to drill based on the smell of the soil, or even their wives' intuition, are long gone.

"It used to be that you'd get an idea in mind, get the money together, get a partner, and go drill," he says. "It wasn't technical at all. Now, if a person wants to do that, the engineers will say, 'What does the subsurface tell you about the area? What do the 2-D seismic lines say? Have you ever thought of running a 3-D?' It'll turn into a technical discussion."