The gist: On Monday, the price of oil had its greatest one-day plunge ever, and coronavirus officially arrived in Louisiana. Markets tumbled nationally, with signs pointing toward a global recession on the horizon. These developments pose threats the Lafayette economy is particularly vulnerable to.
Prices this low will stop drilling. With oil prices at $33 per barrel, drilling new wells doesn’t make financial sense. In just the last couple of days, shale oil and gas producers have cut back on investing in new wells. Lafayette’s oil industry makes its money in large part by providing services that aid in drilling; for example, landmen who acquire the rights to drill, roughnecks who work on the rigs and companies that provide equipment. All of those will be negatively affected, according to industry sources I’ve spoken with. If oil prices stay this low, we could be looking at a downturn as bad as 2014.
Oil is expected to be down for months. Demand was already falling because of the coronavirus, and now supply is up as Saudi Arabia announced price cuts and additional production along with some other OPEC nations. As a result, oil prices have dropped 50% since January. It seems likely they’ll stay down for a while, both because coronavirus is expected to continue suppressing demand for months and because shale oil from the U.S. fracking boom is in the middle of an international price war. If prices do stay this low for any significant amount of time, some producers will go bankrupt, which would further erode demand for what Lafayette’s oil industry offers.
Meanwhile, the coronavirus’s appearance in Louisiana threatens the local tourism and hospitality industries. A study commissioned by CREATE and conducted by UL and LEDA found that Lafayette’s cultural industries account for more than 30,000 jobs and $1.5 billion in GDP. A big part of what drives that are our major gatherings like Festival International and visitors to our restaurants and entertainment venues. But we’re already seeing a huge impact on those activities nationally. Like the city of Austin canceling South by Southwest and banning all gatherings with more than 2,500 people. Seattle has gone even further by capping the size of public gatherings at 250 people. And in countries like Italy, where the coronavirus is a full-blown pandemic, country-wide quarantines and efforts to encourage social distancing are stopping tourism in its tracks and leaving restaurants empty. Even if our major events don’t get nixed, Lafayette’s still going to see a downturn of tourism and consumer spending for at least the next couple of months, and it wouldn’t be surprising to see many events canceled outright.
A national recession could be devastating for Lafayette. The U.S. economy was already seeing indications that it was heading to a national recession, according to UL economist Gary Wagner, as one key predictor from the Federal Reserve Bank of New York on March 3 put the odds of a national recession happening this year at 30%. Historically, every time this metric hit 30%, a recession has followed soon after. And that’s before the most recent downfall of oil prices, the rapidly growing uptick of the coronavirus, and the big losses in the stock market. Lafayette made it through the Great Recession of 2008 relatively unscathed because of its oil and gas sector. This time around, Lafayette can’t count on that to float us safely to the other side. So any national recession will hurt a lot more this time.
This won’t just hurt Lafayette’s businesses; it’ll also hurt finances of local and state government. Every $1 drop in the price of oil deletes $11-12 million in direct state tax revenue. And that’s before we factor in the likely drop in sales tax revenue due to a coronavirus-related decline in consumer spending. It’s already become a matter of discussion as the Legislature prepares to debate the budget. Dips in sales tax revenue could also impact city and parish finances. That means less money for education and infrastructure and healthcare and everything else we need from the government, just a year after the Legislature worked its way back from the so-called “fiscal cliff” and in the middle of a year when LCG’s already facing significant budget shortfalls.
This is going to hurt. Some amount of economic pain is coming for Louisiana, and that could be felt acutely in Lafayette given current economic conditions. At a minimum, this will be a rough three to six months, but it could be much more than that. “We’re in the middle of a wait and see,” says LEDA’s Gregg Gothreaux