Role of Energy in the US Economy

        Harvey Rosenblum, Professor of Business and Financial Economics at the SMU/Cox School of Business, recently spoke at a Thompson & Knight oil and gas lunch.  Mr. Rosenblum addressed the impact of the recent drop in oil prices on the economy as a whole.  He said that the United States will benefit from lower energy prices, but he questions how much benefit there will be.  According to recent reports, thirty-two states are now producers of oil and gas.  Of the twelve Federal Reserve districts, nine of them are still suffering the effects of the recession. The three districts that have pulled out of the recession, including the Dallas district, are energy focused.         Mr. Rosenblum pointed to several causes of the recent decline in the oil prices.  U.S. oil production has increased 50% during the last four years.  Global oil demand has grown slowly as the global economic growth decelerated. In short, there is a glut of oil. Saudi Arabia increased its output to gain market share and to inflict pain on other producers, primarily Iran, Russia and the U.S.           If the 50% drop in oil prices remains in effect for twelve months, it is estimated that Texas will lose 140,000 jobs.  Texas will not, however, be one of the biggest losers.  Mr. Rosenblum thinks that Texas will not experience a full blown recession as a result of the drop in oil prices.        Bigger losers will be Venezuela, Russia and other parts of the United States.  In Venezuela, oil is 96% of its export revenue.  The price for Venezuela’s government bonds has fallen from 90 to 40 cents in the last six months.  Russia is already in recession, and there is the potential for it to default on its debt.  In the United States, former steel towns, such as Youngstown and Lorain, Ohio and Wheeling, West Virginia, were beginning to experience an economic recovery as a result of the shale development.  Those towns may see setbacks in their recovery if the oil price remains depressed.              Mr. Rosenblum predicts an adjustment process to occur as a result of the drop in oil prices,  The adjustment process will include a reduction in labor costs.  Workers in the North Sea are already facing 15% pay cuts.  Companies will move drilling activity to lower cost locations and will lean on contractors for price reductions.  Access to debt will be reduced as capital markets shift.  The leaner, lower-cost producers will survive and eventually grow again.          Mr. Rosenblum stated that every industry experiences cyclical economic upturns and downturns.  He predicts that the energy industry will be fully recovered and roaring ahead by 2017.  Thompson & Knight LLPDebra Villarreal