From Staff and Wire Reports
President Donald Trump’s decision to impose tariffs on an additional $300 billion in Chinese goods sent oil markets into a nosedive last week, delivering a setback to an already slumping energy industry and a potential blow to a state economy still linked to the fortunes of the oil and gas sector.
Oil prices plunged 8 percent in a little more than hour after the president’s Thursday tweet that he would impose a 10 percent tariff on the remaining Chinese products not covered by earlier rounds of tariffs as of Sept. 1. Stock markets fell, too: the Dow Jones industrial average shed 285 points, or 1 percent.
Though not enough to offset Thursday’s massive loss, oil was trading about 3 percent higher Friday on news of another weekly decline in the number of U.S. rigs drilling for oil. But financial markets around the world buckled and all three major U.S. indexes were on track for their worst week of 2019.
With Trump saying he would tax “the hell out of China” if no trade deal is reached, the Dow Jones industrial average dropped 300 points, or more than 1%, in morning trading Friday. It rebounded somewhat but remained down more than 200 points by midafternoon.
Crude, which suffered its steepest one-day drop in four years Thursday, took the worst of that day’s beating because of concerns that the escalation of the U.S.-China trade war would further slow global economic growth and weaken energy demand when supplies are plentiful and U.S. production is booming.
The rout in oil markets — and the prospect of lower prices — comes just as oil and gas jobs have begun to creep back. The oil and gas extraction sector only began posting year-over-year gains in February, turning positive for the first time since the oil bust began in 2014. Now the question is whether the state’s energy sector will be able to keep adding jobs if the trade war further weighs on the global economy and energy demand.
“It will be detrimental to Houston and Texas,” said Craig Pirrong, a professor of finance at the University of Houston, of the impact of continuing tariffs. “The fact that oil is bearing the brunt of this announcement suggests that Houston is going to fare relatively worse compared to other areas of the U.S.”
Oil was hit particularly hard by the tariff news because the underlying fundamental of energy markets were already weak, said Michelle Foss, a fellow in energy and minerals at the Baker Institute for Public Policy at Rice University. While geopolitical developments, such as Iran’s seizure of ships in the Strait of Hormuz, may drive prices higher temporarily, there’s simply too much supply in the global market to maintain high oil prices, she said.
“As long as oil is under pressure because of the abundance of supply, we’re going to see this situation over and over,” Foss said. “It’ll go up on geopolitics and it’ll fall on something about the underlying economy and trade.”
U.S. oil and gas producers have continued to pump record amounts of crude oil, producing 12.2 million barrels of oil per day last week, according to the Energy Department’s latest report. Continued record production in the U.S. has resulted in investor fears that the global market for crude will become too saturated.
The growth in world oil demand, meanwhile, is expected to decline. The Chinese economy, the second largest in the world, is slowing, at least in part due to U.S. tariffs, and that is reducing its appetite for energy. More tariffs are only likely to depress energy demand in China, which is a major importer of oil.
Despite the recent turmoil, the Texas economy remains solid. Unemployment is near all-time lows and employment is growing across most sectors.
But other indicators of economic health — notably a decline in manufacturing orders and falling oil prices — forecast a slowdown, according to a recent analysis by the Federal Reserve Bank of Dallas. Manufacturing, which as already taken hits from tariffs on steel, is closely tied to the energy sector in Houston.
Hitting the brakes
The hit to oil prices from tariffs is likely to put the brakes on energy company investments, experts said. Second quarter earnings for Texas-based oil and gas companies have been relatively lackluster compared with last year. Many saw profits fall sharply from a year ago.
Halliburton’s profits, for example, plunged to $75 million in the second quarter, down from $511 million during the same period in 2018. The Houston oil field services company, hit by slumping activity in the Permian Basin and other U.S. shale oil fields, said last month it would cut 8 percent of its North American workforce.
Surveys of energy executives in Texas conducted by the Federal Reserve Bank of Dallas found capital expenditures by energy firms were down in the second quarter. Uncertainty about the global trade situation is likely causing firms to pause investment for the time being, experts said.
“People have to watch Trump’s Twitter feed to see what happens next,” said Pirrong, of the University of Houston. “Uncertainty is an impediment to investment, and it’s quite difficult to plan in these circumstances.”
The president wrote that the tariff was a response to China deciding to renegotiate a trade deal and failing to buy “large quantities” of American agricultural products. Despite the president’s insistence that the trade war will help rectify a trade imbalance with China, Texas has yet to see the benefits. The region imported more Chinese goods and exported fewer goods in 2018 than in 2017.
China is the third-largest export market for goods from Texas, behind only Mexico and Canada. It is the second-largest importer of goods to the state, with only Mexico having a bigger impact.