Quote of the Day: The Texas Boom Bust Oil Economy

Writes analyst Wolf Richter at the Wolfstreet.com

This money was drilled into the ground. It was used to build office towers for the booming energy sector and everything that came along with it, such as law firms and engineering firms. It was used to build apartment towers. It drove technology forward and funded innovation. It bought equipment. It fed manufacturers that supplied the oil industry. It paid for the construction of hotels and temporary housing for oil workers even in small towns….

And along the way, the money paid for wages, salaries, bonuses, and royalties, and folks went out and spent this money.

The state government was ecstatic with this influx of cash. Retailers were even more ecstatic and opened new stores. Mall owners were happy. Banks bathed in bliss and extended huge loans to drive this miracle to the next level. Consumers were expressing their happiness by feeding retail profits and state coffers alike.

Retail sales recycled the money and contributed to the strong Texas economy. Everything went right – until the price of oil plunged.

Now oil and gas companies are going bankrupt. Manufacturers and service providers that supply the oil and gas industry are sinking into the mire. People are getting laid off, from retail workers to high-level engineers in the energy sector. And sagging retail sales indicate that these folks, and others around them, are closing their wallet or that they’ve maxed out their credit cards after losing their jobs.

Tax collections on motor vehicle sales and rentals had experienced an even greater boom. From the first half of 2010 to the first half of 2015, they’d soared 65%! Car dealers were on cloud nine! But that boom too is now imploding, with tax collections in January for December sales dropping 3.8% year over year!

And commercial real estate is getting hit. Debt is everything in the sector. So this is going to be a problem for banks. The entire math is based on high rental rates and low vacancy rates. But in Houston, rental rates are falling and vacancy rates are skyrocketing. Sublease space has spiked 69% and continues “to sit on the market,” even while new towers are being completed. “See-through buildings” are re-appearing — that infamous phenomenon of vacant and transparent buildings dotting Houston’s business district during the last oil bust. So watch the banks. 

The Delusion Of The Mercantilist Miracle

Nobel Laureate Paul Krugman in his blog wrote, (hat tip: William Anderson)

“As I’ve written many times in various contexts since the crisis began, being in a liquidity trap reverses many of the usual rules of economic policy. Virtue becomes vice: attempts to save more actually make us poorer, in both the short and the long run. Prudence becomes folly: a stern determination to balance budgets and avoid any risk of inflation is the road to disaster. Mercantilism works: countries that subsidize exports and restrict imports actually do gain at their trading partners’ expense. For the moment — or more likely for the next several years — we’re living in a world in which none of what you learned in Econ 101 applies." (bold emphasis mine)

Well the Pope of Keynesianism believes [and prescribes policies] that by slapping protectionist measures on China, US jobs will return and the US economy will boom.

Even if such absurdity is deemed as a calculated gambit to 'coerce' China to reform her policies, Mr. Krugman apparently is playing the game of chicken or brinkmanship.

Mr. Krugman and his ilk forgets that once these fulminations become real, where actions will lead to counteractions, then protectionism is likely to spread outside the US-China sphere.

Now one can't help but notice that the US is presently heavily dependent on oil imports to sustain her economy.

chart from the Heritage Foundation

According to wikipedia.org, ``American dependence on oil imports grew from 24% in 1970 to 65% by the end of 2005. At the current rate of unchecked import growth, the US would be 70% to 75% reliant on foreign oil by the middle of the next decade. Transportation has the highest consumption rates, accounting for approximately 68.9% of the oil used in the United States in 2006, and 55% of oil use worldwide as documented in the Hirsch report." (bold highlight mine)

This only means that the unforeseen consequences of a fallout from protectionism is so massive that it would defeat whatever "noble" goals (but ludicrous), it is set to accomplish. This also implies that the US is terribly dependent on global trade as to even harbor the notion of "protectionism" (which would be tantamount to national suicide)

One may argue that the US may resort to invading nations that refuses to provide her with oil, but that in essence would validate Frederic Bastiat who once said that "When goods don't cross borders, armies will" .

Since protectionism translates to a closing of borders to trade, finance, investments and possibly even migration, this also means the imposition of capital controls too.

Hence the US is likely to default on her debts while engaging massive inflation to fund her war interests.

Does this lead to anywhere to near an economic boom? Hardly. Instead, it points to a reverse: a global depression plagued by war, needless deaths and poverty, courtesy of deceitful mercantilists fanatics.

So we agree with Stephen Roach, who just harshly rebuked Mr. Krugman, as quoted in Bloomberg,

“We should take out the baseball bat on Paul Krugman -- I mean I think that the advice is completely wrong,” Roach said in an Bloomberg Television interview in Beijing when asked about Krugman’s call, characterized as akin to taking a baseball bat to China. “We’re lashing out at China rather than tending to our own business,” which is raising U.S. savings, Roach said."

Or perhaps, by taking on such seemingly reckless policy prescriptions, could Mr. Krugman be unwittingly be helping advance Osama Bin Ladin's cause of bankrupting America?