Why Texas Isn’t Cheering Oil Price Spike

Oil prices are higher than they’ve been in years, but Houston isn’t celebrating.

In decades past, Texas’ largest city and the broader state economy would get a sugar rush from $100-a-barrel oil, even if the rest of the country was struggling with higher costs. The war in Iran has changed that dynamic, and Texas has changed, too.

U.S. oil companies haven’t announced major plans to increase their production, which means there won’t be a big jump in employment or investment from the price spike. And higher fuel prices could serve as a drag on the economy. While AAA showed Texas gasoline prices about 32 cents below the national average Sunday, they were still up more than 30 percent from a year earlier.

“The war would have to look like it's gonna go for a long time before it would stimulate the local economy,” Steven Craig, an economist at the University of Houston who studies the Texas business climate, said in an interview. Meanwhile, he said, “higher gasoline prices are taking money out of people's pockets.”

The Iran war — and the disruption to the world’s energy market — will likely be a key theme as oil and gas leaders gather in Houston for the annual CERAWeek by S&P Global conference that opens Monday. Thousands of well-dressed executives and officials will descend on downtown, a reminder that the city has long seen itself as the U.S. energy capital.

Benchmark U.S. crude was trading Friday for about $98 per barrel, while global Brent crude was around $112. For much of the past year, oil has traded below $70 a barrel.

To be sure, high oil prices bring billions of dollars of new revenue to U.S. oil companies. That led to record profits in 2022 following Russia’s invasion of Ukraine. But Texas and its major cities aren’t waiting around for a drilling boom.

Just 4 percent of the Houston area’s gross domestic product came from oil and gas extraction in 2024, down from 8 percent a decade earlier, according to the Greater Houston Partnership. Manufacturing and services tied to oil and gas still have a huge impact on Houston — and analysts aren’t projecting a surge in business given uncertainty around the war in Iran.

The bombing campaign and the fighting in the Strait of Hormuz have caused the largest disruption in the history of the world oil industry, S&P Global Vice Chair Daniel Yergin said last week on POLITICO’s energy podcast.

“There’s never been anything from a daily production view of this scale, and it’s affected not only oil but also natural gas,” he said.

Texas produces about 40 percent of the country’s crude and is home to about a third of the country’s refining capacity. But the oil price spike has been too sudden and too volatile to convince oil companies to drill more wells.

That’s a change that has accelerated over the last decade or so. Shale drillers, which can drill wells faster than conventional oil produced, would respond in the past to higher oil prices in hopes of snagging a quick profit.

Over the last five years, the oil patch has changed and international companies including Exxon Mobil and Chevron have swallowed up many of the independent producers. The companies — which are both based in Texas — didn’t respond to requests for comment Friday.

The majors are more focused on long-term goals and aren’t interested in drilling new wells because of a temporary price spike, Mark Chapman, principal analyst for oil field services at Enverus Intelligence Research, said in an email.

“It’s possible private companies could add some extra rigs, but they have limited inventory and there is only so much they can add,” he wrote.

Todd Staples, president of the Texas Oil and Gas Association, said companies are hoping for “a speedy solution” to the conflict.

“Market volatility and short-term price fluctuations create challenges for industry planning, which relies on stability to drive future investment,” Staples said in a statement.

Refineries will see a short-term profit increase because the so-called refining margin — the spread between the price of oil and the price of fuel like gasoline and diesel — has widened.

“Oil product prices have spiked more significantly than that of crude prices, and therefore we have an increase in margins for refineries,” said Ajay Parmar, director of energy and refining at ICIS, a consulting firm that tracks commodity prices.

But Texas is vulnerable to the same price shocks that are trickling through the rest of the economy — from the grocery store to interest rates.

“Most people will see this as an increase in prices,” Tufts University economist Michael Klein said in an interview. “It's not just oil, because transportation is a really important part of goods prices. And you have concerns about interest rates in the future, which makes borrowing money for a house or a car more expensive.”