OKPOLICY.ORG
Chan Aaron is an OK Policy intern. He is pursuing an environmental policy degree at The University of Tulsa. He is also a graduate of Oklahoma State University with a degree in philosophy and a veteran of the United States Navy.
Oklahoma’s deep ties to the oil and gas industry are common knowledge. One estimate is that approximately 1 in 4 jobs in Oklahoma are tied either directly or indirectly to the energy industry, and a report by the Council on Foreign Relations ranked Oklahoma in the top 3 state economies most sensitive to the price of oil. Oklahoma’s dependence on this industry brings prosperity to the state when oil prices are high and the industry is booming. But the downside can be just as dramatic when the price of oil starts dropping — as it did starting in June of last year.
In a report from this past March, Chad Wilkerson, economist and Oklahoma City Branch Executive of the Federal Reserve Bank of Kansas City, analyzed six past oil price declines and their subsequent effects on Oklahoma’s economy. In all six major oil price declines since 1980, employment in the mining sector – which in Oklahoma is about 95 percent oil and gas – experienced a subsequent one-year decline of between 7 and 20 percent following the drop in the price of oil. In five of the six declines, state sales and gross receipts tax collections – a good indicator of consumer spending – decreased more than 7 percent. In four out of six declines, overall employment decreased and total employment stayed below its previous peak for at least three years afterward.
The oil crisis most like today’s
Wilkerson concludes that of the six episodes he studied, the 1985-86 episode is most similar to the current one. Both happened quickly and outside the context of a national recession, and the size of the Oklahoma oil and gas sector before the 1985 crash was similar to today’s.
The oil crash of 1985-86 wreaked havoc on Oklahoma’s economy. According to the Oklahoma Historical Society, “The traumatic collapse of the energy business led to substantial out-migration, failure of financial institutions, excess capacity in real estate, and fiscal crises in state government.” Those Oklahomans with enough grit to stick it out had to pick up the pieces and decide how to prevent another economic catastrophe in the future.
[pullquote]”The similarities between the 1985-86 episode and the current one are worrisome, given the extent and duration of the 1980s economic devastation.”[/pullquote]Since those dark times in the 1980s, Oklahoma has had decades to diversify our economy and become more resilient in the face of another oil crisis. But how much progress have we really made since then? Wilkerson tried to answer this question in 2011 by looking at Oklahoma’s diversification index, which compares the makeup of the state’s industries with the nation as a whole. Wilkerson wrote, “Based on this measure, which analyzes shares of personal income in more than 80 detailed industries, the state’s economy diversified considerably in the 1990s but has almost completely ‘undiversified’ since.”
Wilkerson cites two differences that may give more hope for today: 1) unemployment was much higher (over 7.5 percent) heading into the 1985-86 episode compared to mid-2014 (4.5 percent), and 2) since the late 1990s, oil prices have bounced back much more quickly from downturns.
How the current bust has played out so far
So how much economic damage has the oil crash done so far, and how long will the bleeding last? Wilkerson examined those questions in a June report. He found that from December 2014 through April of this year, Oklahoma manufacturing employment decreased 1.4 percent. Transportation and business service jobs were down 0.7 percent. Those combined with the energy sector job loss means that total Oklahoma employment decreased by 0.2 percent during the first half of 2015.
The effect has been much more keenly felt in rural areas where the percentage of oil and gas jobs is much larger. Employment is down 1.4 percent outside of Oklahoma City and Tulsa. Meanwhile, Tulsa’s employment rate remained steady, while Oklahoma City actually grew commensurate with national growth.
While data does suggest that the negative economic trend will continue, projections suggest a less severe decline in the months to come. According to the Kansas City Federal Reserve’s latest quarterly survey, 19 percent of energy companies in our region expect to cut employees in the next six months, 13 percent expect to add employees, and 59 percent expect no change.
The bottom line
The similarities between the 1985-86 episode and the current one are worrisome, given the extent and duration of the 1980s economic devastation. Oklahoma’s economy so far has not seen nearly as dramatic a collapse as in that decade, but the energy industry’s difficulties have spread throughout other sectors and will likely continue to do so for an undetermined amount of time. It’s clear that Oklahoma has more diversifying to do if we’re to free ourselves from the boom and bust turmoil that comes from relying too much on one volatile industry.
I would note that the ’85-86 bust followed the ’81 with its collapse of Penn Square and the Oklahoma banking industry, which the state had not recovered from when the next bust hit. Because of the lack of credit — and the huge numbers of property foreclosures following the closing of Penn Square and the collapse of the local banking industry —and the overabundance of fire-sale real estate prices, the Oklahoma economy was hit in ways that can’t be compared to today’s bust and economy.
That said, the Quality Jobs Act — which you have done great work analyzing its lack of impact — was created following the 80’s busts to diversify the economy and make sure we never again had such a disastrous one-act show. I think the state of today’s undiversified economy is another example of the failure of this program. Creating a great quality of life was and continues to be repeatedly cited as a major basis for determining where companies locate. Creating a more open and creative culture, having good schools, an abundance of college graduates, etc. — those things where we are cutting funding — have long been listed as pluses. I feel we’re losing sight of what has and hasn’t worked.