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DALLASFED
FOURTH QUARTER 2013

Southwest
Economy

}

Water Scarcity a Potential
Drain on the Texas Economy
PLUS
} Barbecue vs. Gumbo: Economic Traits Tie Neighboring
Texas and Louisiana

} Shale Revolution Feeds Petrochemical Profits
as Production Adapts

} On the Record: You Can Go Home Again:
Mexican Migrants Return in Record Numbers

} Spotlight: Energy, Trade in Southern New Mexico Lift
State’s Economic Performance

President’s Perspective

T

“it’s always bigger
}The
in Texas” way of thinking
faces a stern test when
it comes to scarce water
resources and how the
state allocates them.

exas’ growth prospects depend in no small measure on ensuring durable and ample infrastructure—whether it be roads, bridges, electricity
generation or water delivery. As Keith Phillips,
Edward Rodrigue and Mine Yücel highlight in this issue of
Southwest Economy, the “it’s always bigger in Texas” way
of thinking faces a stern test when it comes to scarce water
resources and how the state allocates them.
Here in the fast-growing but thirsty Southwest, the
water problem is not just a result of the ongoing drought.
Supplies and allocation methods have proven insufficient
to keep up with demand. Although finding a way to increase resources would help, we also must better apportion
what we have to more effectively meet our needs.
The “rule of capture” establishes ownership of natural
resources that include groundwater in aquifers, plus oil
and gas. The general rule is that the first person to capture
a resource—in this case, drill and tap underground water—
owns it fair and square. Without defined property rights, a
shared resource is often overused—something economists
call the “tragedy of the commons.” By comparison, the state
owns and administers surface water, which is collected in
the state’s man-made lakes for eventual use in many of our
cities.
Establishing a mechanism for the exchange of groundwater—especially in farming—would introduce water
markets that could give people the option to buy, sell or
lease water rights and enable more efficient allocation, use
and pricing. Property rights can establish ownership and
markets can set prices to reflect potential users’ value for
water.
It is encouraging that some regions are already using
such market principles to manage their resources. Examples are the system governing the Edwards Aquifer in Central Texas and the water market in the Lower Rio Grande
Valley.
We are justifiably proud of the opportunities that Texas
affords to those with the vision and know-how to pursue
them. That same kind of creative thinking will be necessary
to help craft a market-based, comprehensive water solution
that secures and allocates resources in the years to come.

Richard W. Fisher
President and CEO
Federal Reserve Bank of Dallas

Water Scarcity a Potential
Drain on the Texas Economy
By Keith Phillips, Edward Rodrigue and Mine Yücel

T

exas has abundant natural resources, but water scarcity has
the potential to impede the
state’s economic growth. Protracted drought in Texas has renewed
awareness of water availability as one
of the most pressing economic issues
facing the state.
As water supplies shrink, demand
is projected to rise, with Texas’ population doubling to 52 million residents by
2047, according to the Texas State Data
Center. Farming consumes the lion’s
share of the water supply. With the
state’s metropolitan areas expanding,
however, urban demand for water has
intensified.
Historically, users drew water
freely from nearby streams or from
groundwater aquifers—subterranean
bodies of water replenished by rain
seeping through the soil and rock.
But as Texas’ growing population has
strained its limited water resources,
the allocation of water has become
increasingly important. Property rights

Texas’ growing
}Aspopulation
has strained
its limited water
resources, the allocation
of water has become
increasingly important.

Chart

1

Lower Colorado River Authority Drought Curtailment
Cuts Into Agricultural Use
2011 Water Use

2012 Water Use

(Share of total)

Environmental
4%

(Share of total)

Other uses
1%
Municipal
28%

Environmental Other uses
1%
7%
Agricultural
21%
Municipal
47%

Industrial
7%

Agricultural
60%

Industrial
24%

SOURCE: Lower Colorado River Authority.

and markets can play a significant role
in allocating water efficiently by establishing ownership and setting prices to
reflect water’s scarcity.

Running Dry
In 2011, Texas suffered its worst
single year of drought since records
began in 1895, and the state’s climatologist anticipates the region will remain
drier than normal for another 15 years.
Texas has a long history of regular and
severe droughts.1
The stakes are particularly high for
farmers, especially in the arid western
half of the state, where low-margin,
high-acreage crops such as alfalfa and
cotton are harvested.
Along the Coastal Bend, where
drought reduced water availability in
2012 and 2013, the Lower Colorado
River Authority (LCRA) cut off most
rice farmers’ water to limit curtailment in Austin. The action reduced
agriculture’s share of water from the
LCRA—one of 16 water authorities in
the state—to 21 percent in 2012 from
60 percent the year before (Chart 1).
The farm sector uses the most water statewide, 61 percent, followed by
municipalities at 27 percent (Chart 2).
Manufacturing uses 6 percent, power
generation 3 percent and livestock
2 percent, while oil and gas drilling
accounts for about 1 percent.2
As Texas cities grow, water demand expands. Farmers, whose water
rights are traditionally allocated based
on historical use, can’t benefit from
selling their water to cities without
developed markets. Municipalities,
whose water prices often don’t reflect
scarcity and thus discourage conservation, are forced to ration supplies
during dry spells.
Bolstering supply with new reservoirs is becoming more difficult. Dallas

Southwest Economy • Federal Reserve Bank of Dallas • Fourth Quarter 2013

3

current allocation
}Ifmethods
remain
unchanged, overall Texas
water supplies could
contract 3.3 percent by
2020 as demand rises
5.4 percent.

in 2010 to 8.4 million in 2060 because
of more efficient irrigation systems,
reduced groundwater supplies and the
transfer of water rights from agricultural to municipal uses.
The plan also relies on water
markets. How far market solutions can
go toward distributing water depends
on the location of supplies, the ability
to monitor usage, and the legal and
regulatory frameworks governing water
allocation. Both surface and groundwater lack true market pricing, although the most severe challenges are
in groundwater use because property
rights do not exist.5

needed three lakes to meet its water
needs in 1970; now it draws from eight
lakes up to 90 miles away, with plans to
go more than 200 miles to the Texas–
Louisiana border.
Texas water comes from aquifers
(groundwater) and rivers, lakes and
reservoirs (surface water). Panhandle
farmers pumping the Ogallala Aquifer
account for 60 percent of state groundwater use (Chart 3). Aquifers decline
when pumping outpaces replenishment.3
The Ogallala typifies the state’s
thirst for water. It has fallen several feet
per year in some areas, while its average recharge rate is a half-inch per year.
If current allocation methods
remain unchanged, overall Texas water
supplies could contract 3.3 percent by
2020 as demand rises 5.4 percent.4 The
2012 State Water Plan, derived from 16
regional water plans, suggests a mix of
novel supply-and-demand strategies to
meet urban needs.
Conservation, reuse and redistribution of existing supplies account for
more than a third of proposed projects.
Development of additional surface
water supplies makes up another third,
and new reservoirs account for about
a fifth. The state plan suggests that demand for agricultural irrigation water
will decrease from 10 million acre-feet

Chart

2

Groundwater Allocation Challenges
Sixty percent of Texas’ water comes
from groundwater aquifers, and farmers rely on groundwater for 80 percent
of their irrigation use. Several problems
plague Texas’ groundwater management, endangering local economies
and wildlife.
Texas does not assign ownership
rights to groundwater. A legal doctrine—the “rule of capture”—allows
any landowner to drill a well and, in
many parts of the state, pump almost
unlimited amounts of water. Because
water becomes private property only
after a landowner draws it from the
ground, there is a strong incentive to

Most of Texas’ Water Used for Irrigation
(2011 consumption shares)

Manufacturing
6%

Mining
1%

Steam electric (power)
3%

Municipalities
27%

Livestock
2%

SOURCE: Texas Water Development Board.

4

Southwest Economy • Federal Reserve Bank of Dallas • Fourth Quarter 2013

Irrigation
61%

Chart

3

Texas’ Major Aquifers Provide Groundwater Supplies

Pecos Valley
Seymour
Gulf Coast
Carrizo - Wilcox (outcrop)
Carrizo - Wilcox (subcrop)
Hueco - Mesilla Bolson
Ogallala
Edwards- Trinity Plateau (outcrop)
Edwards- Trinity Plateau (subcrop)
Edwards BFZ (outcrop)
Edwards BFZ (subcrop)
Trinity (outcrop)
Trinity (subcrop)

NOTES: Outcrop refers to that portion of the aquifer in which water passes through a permeable layer of surface rock, allowing relatively quicker recharging. In the subcrop
portion, water passes through an underground layer of rock, creating a slow recharge process. BFZ stands for Balcones Fault Zone, a region of the Edwards Aquifer.
SOURCE: Texas Water Development Board.

be the first to pump. Economists call
this the “tragedy of the commons.”
Groundwater pumping from an aquifer
has negative spillovers because one
person’s actions leave less for everyone
else. The system sends users exactly the
wrong message: Pump faster as water
becomes scarcer.
Groundwater conservation districts, the government bodies formed
to address this issue, are made up of
local users who decide how best to
use the water in their county-sized
jurisdictions. Because district borders
follow county lines, several districts
may overlay the same aquifer. Hence,
the rule of capture extends the negative spillover from the individual to the
district level.
One market-based solution, applied successfully in Australia and to
surface water in the Lower Rio Grande
Valley, is cap and trade. In this system,
the state allocates—or caps—pumping rights and turns water into private
property. Users are given well-defined
deeds to water, in terms of the amount

of water they can pump. These can be
traded, leading to a market for water,
facilitating efficiency and conservation.
Prices that arise from this system are
closer to market prices than rate schedules set by agencies.
Texas House Bill 1763, passed in
September 2005, recognized the “common pool resource” problem associated
with competing groundwater districts.
This legislation shifted decision-making
toward larger entities that encompass
entire aquifers, called Groundwater
Management Areas (GMAs), which are
overseen by the Texas Commission on
Environmental Quality.6
With GMA oversight, an aquifer’s
constituent districts agree on “desired
future conditions,” a 50-year objective
for groundwater levels. They outline
how much each district will take, in
essence assigning ownership to fixed
quantities of water. GMAs could begin
to facilitate markets by overseeing trade
among districts. To measure groundwater allotments, however, wells need
meters. Most groundwater conserva-

tion districts do not require farmers
to install meters; most cities do not
regulate “domestic” wells, which can
pump up to 25,000 gallons a day. The
High Plains Water District in Northwest
Texas, whose area includes Lubbock,
is an exception, requiring meters on all
wells by 2016.7
The cap level on withdrawals is
also critical. The cap can be set to sustain the aquifer, which means drawing
only on the average annual recharge.
The Edwards Aquifer Authority in
Central Texas, which serves San Antonio, oversees a cap-and-trade system.
The current cap of 572,000 acre-feet is
equal to the current permitted usage
authorized for municipal, industrial
and irrigation purposes. However, this
amount does not include withdrawals
from exempt wells, which can draw
up to 25,000 gallons per day. During
periods of drought, the authority issues
mandatory curtailments rather than
buy back the permits, and some users
exploit the loophole by drilling exempt
wells.8

Southwest Economy • Federal Reserve Bank of Dallas • Fourth Quarter 2013

5

Despite an array of challenges,
groundwater often lends itself well
to market trading. This is particularly
true for aquifers similar to the Edwards
that serve both agricultural and urban
areas. To complete a local transaction,
users rarely need to physically move the
water; they can sell pumping rights to
each other, with one user simply pumping less while the other pumps more.
When property rights to a resource
are not allocated, it can be overused.
Establishing groundwater rights would
help end Texas’ pumping free-for-all
and create a more efficient distribution
of aquifer resources. But as long as the
rule of capture remains in place, property rights assigned by GMAs and aquifer authorities face frequent challenges.
In recent rulings involving the Edwards
Aquifer Authority, the Texas Supreme
Court suggested that a formula taking
into account land acreage above an
aquifer as well as historical usage may
be a better and legally defensible way
to allocate water rights.9

Surface Water Supply Issues
Forty percent of Texas water supply
comes from surface water, found in
rivers and reservoirs. Surface water is
particularly important to cities, supplying 62 percent of their water.
Texas’ surface water management
institutions are more developed than
their groundwater counterparts. The
state owns surface water, holding it in
trust for the public. Property ownership is defined: Residents and river
authorities apply for the right to use the
water or buy existing rights from others.
Twenty-three state-chartered wholesalers (river authorities) own 70 percent of
these rights (Chart 4).
River authorities manage reservoirs and sell water to cities and farmers. Their policies—rather than supply
and demand—dictate prices. Typically,
water is priced to reflect purification
and transportation costs but not its
opportunity costs (reflecting scarcity),
leading to overuse and consumption
rationing.
“Take or pay contracts,” requiring
municipalities to pay for river authority
water whether they use it or not, further

6

encourage water consumption even
during periods of scarcity. The state
also issues too many rights, causing
existing rivers to be oversubscribed
during droughts. Users need not buy
water when they can obtain cheap new
water rights from the state or exceed
their current allotment.10 Low prices
and inflexible contracts both promote
water use.
Texas has the legal and regulatory
framework needed for efficient surface
water use, but small changes in implementation could improve outcomes.
When water is scarce, capping total
diversion rights and monitoring them
carefully would allow Texans to adapt
through water markets. Water rights
have traditionally been allocated by
historical use and land access. The key
is to provide users with certainty about
the rules of water sales and well-defined rights that are not over-allocated
to make trading simpler and more profitable. Greater potential profits would
encourage participants to finance infrastructure, such as pipelines, needed to
move water.

Benefits of Water Markets
Water markets, which allow people
to buy, sell or lease water rights, can allocate water to its most productive uses
and help alleviate shortages. Prices are

Chart

4

not set by an agency but are negotiated in the market process—rising in
periods of relative scarcity and falling
during times of relative abundance.
This adjustment mechanism balances
the quantities demanded and supplied,
minimizing shortages.
Given that river authorities and
municipalities will remain major players, how can surface water be priced
so that it is allocated efficiently? In lieu
of fully competitive markets, innovative contracts between big buyers and
sellers can replicate market outcomes.
The Edwards Aquifer Authority, before
opening its cap-and-trade system,
experimented with an irrigation-suspension program. Participating farmers
left their land fallow for cash and cities
received water.
To ensure every household has access to a base level of affordable water,
households in municipal systems could
receive a basic amount of water at a low
price but pay more as their consumption increased, reflecting the marginal
cost of the additional water. Some researchers have even suggested market
mechanisms that allow households
to sell some of their basic allocation if
they choose to conserve.11
Because agriculture represents a
small fraction of the state’s economy
but uses most of the water, cities and

River Authorities Control Most State Surface Water

Acre-feet (thousands)

8,000
7,000

Basin total
Top 10 holders

6,000
5,000
4,000
3,000
2,000
1,000
0

os do an do ca ss pe ca pe es ty es de d de e io es to os r ty se
az ra di ra va re lu va lu h ini ec an Re ran abin nton uec acin Braz lphuTrini n Jo
N J - u
Br Colo ana olo o-La Cyp ada La uada Nec s-Tr Nu o Gr
a
o G S an A nio- an into S
i
C C ad
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Gu
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Ri
os
a-G
r
S nto S ac
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s-R
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az
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a
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r
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n
ec
B
Co
nA
La
Sa
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SOURCE: “A Powerful Thirst: Water Marketing in Texas,” by Mary Kelly, Environmental Defense, 2004.

Southwest Economy • Federal Reserve Bank of Dallas • Fourth Quarter 2013

industries would have the opportunity to buy water from the agricultural
sector as their demand increased. This
is already happening in areas such as
the Lower Rio Grande Valley, home
to Texas’ most active water market,
where more than 90 percent of sales by
volume go from farmers to cities.12 Fewer than 300 rice farmers served by the
Lower Colorado River Authority hold
the rights to a majority of the water;
Austin-area homeowners have offered
$100 million for those rights.13
In the Lower Rio Grande Valley,
water rights sell for nearly $2,000 per
acre-foot. Despite the region’s rapidly growing population, a new water
supply project hasn’t been built in 40
years. Farmers turn a profit selling their
water to other farmers and cities, and
businesses can trust they will always
have water, for a price.
The demand for water is sensitive
to price. Estimates suggest that for
every 1 percent increase in the price
of water, farmers use 1 to 3 percent
less. Cities’ water needs are somewhat
less sensitive. A 1 percent price rise
reduces their demand by only 0.3 to 0.7
percent.14
One study found that municipal and industrial buyers across the
American West would pay three to
four times what farmers would pay for
an additional acre-foot of water, on
average.15 Rice farmers, for example,
receive Colorado River water for $6 an
acre-foot; Austin residents pay $151 per
acre-foot.16 If prices were set through a
market rather than by a water authority,
cities and farmers would trade; farmers
would have an incentive to sell more
water and use less by planting fewer
crops, substituting crops that consume
less water or investing in more efficient
irrigation systems.
The realization of water’s value as
a scarce commodity, like oil, will also
promote conservation. People will try
to make money selling unused water,
or save money by purchasing less.
Through market prices, people discover
for which “needs” they’re willing to
pay. Some may find that high prices
preclude miles of irrigated cotton or
lush St. Augustine lawns.

Water Markets’ Promise
It is encouraging that some regions
in the state are using market principles
to manage water. Efforts include the
cap-and-trade system governing the
Edwards Aquifer and the water market
in the Lower Rio Grande Valley. More
widespread use of markets would ensure that Texans have enough water—
and that it goes to its most productive
uses. Many challenges to markets
remain, including the rule of capture,
which impedes groundwater markets,
and “use it or lose it” laws, which hinder surface water markets.
Phillips is a senior research economist
and advisor at the San Antonio Branch,
Rodrigue was a research intern in the
Research Department and Yücel is senior
vice president and director of research at
the Federal Reserve Bank of Dallas.
Notes
See “The Impact of the 2011 Drought and Beyond,”
Texas Comptroller of Public Accounts, February 2012,
www.window.state.tx.us/specialrpt/drought/pdf/96-1704Drought.pdf.
2
See “A Deeper Dive: Gross Domestic Product (GDP)
by State,” The Texas Economy: Economic Outlook,
Texas Comptroller of Public Accounts, 2010, www.
thetexaseconomy.org/economic-outlook/economy/articles/
article.php?name=DD-GDPbyState, and Texas Water
Development Board, Historic Water Use Estimates, August
2013, www.twdb.texas.gov/waterplanning/waterusesurvey/
estimates/index.asp.
3
Aquifers suffer both local and regional declines. The
Ogallala fell 9 percent, on average, from 1950 to 2005,
according to the U.S. Geological Survey. But Texas
experienced sharper drops, and local declines can be more
acute. The aquifer serving parts of the Panhandle fell by
half.
4
Based on 2012 Texas State Water Plan, Texas Water
Development Board, and authors’ calculations.
5
We refer to property rights as the ownership rights to a
defined quantity or share of water, not the ownership rights
to the land where the water resides.
6
See “A Streetcar Named Desired Future Conditions: The
New Groundwater Availability for Texas,” Texas Water
Development Board, prepared for The Changing Face Of
Water Rights in Texas 2008, State Bar of Texas, May 8–9,
2008, www.pg-tim.com/files/TX_Summary_HouseBill36_
Desired_Future_Conditions.pdf.
7
See “Ogallala Aquifer in Texas Panhandle Suffers Big
Drop,” by Kate Galbraith, Texas Tribune, May 22, 2013,
http://stateimpact.npr.org/texas/2013/05/22/ogallalaaquifer-in-texas-panhandle-suffers-big-drop.
8
See “A Powerful Thirst: Water Marketing in Texas,” by
Mary Kelly, Environmental Defense, 2004.
1

See Edwards Aquifer Authority v. Day and Edwards
Aquifer Authority v. Bragg.
10
Some river authorities use this disparity to sell more
water than they own.
11
For example, see “Transferable Rate Entitlements: The
Overlooked Opportunity in Municipal Water Pricing,” by
Robert A. Collinge, Public Finance Review, vol. 22, no. 1,
1994, pp. 46–64.
12
A substantial number of water contracts take place
between farmers. See “Water Marketing as a Reallocative
Institution in Texas,” by C. Chang and Ron Griffin, Water
Resources Research, vol. 28, no. 3, 1992, pp. 879–90.
13
See “Central Texas Coalition Urges Buyout of Rice
Farmers,” by Asher Price, Austin American-Statesman,
March 3, 2013, www.statesman.com/news/news/stateregional-govt-politics/central-texas-coalition-urgesbuyout-of-rice-farme/nWf6J.
14
See “Reducing Institutional Barriers to Water
Conservation,” by Frank A. Ward and J. Phillip King,
Water Policy, vol. 1, no. 4, 1998, pp. 411–20, http://
agecon.nmsu.edu/fward/natural%20resource%20news/
wc_wpolicy_ward_king.pdf.
15
“Emerging Markets in Water: A Comparative Institutional
Analysis of the Central Valley and Colorado–Big
Thompson Projects,” by Janis M. Carey and David L.
Sunding, Natural Resources Journal, vol. 41, no. 2, 2001,
pp. 283–328.
16
See “Central Texas Water Conflict Heats Up Again,” by
Terrence Henry, StateImpact Texas, Dec. 13, 2012, http://
stateimpact.npr.org/texas/2012/12/13/central-texas-waterconflict-heats-up-again.

9

Southwest Economy • Federal Reserve Bank of Dallas • Fourth Quarter 2013

7

On the record
A Conversation with Agustín Escobar Latapí

You Can Go Home Again:
Mexican Migrants Return
in Record Numbers
Agustín Escobar Latapí is a research professor at the Center for
Research and Higher Learning in Social Anthropology in Guadalajara,
Mexico, and is a member of Mexico’s National Academy of Sciences.
A specialist in Mexican social policy and migration, he discusses the
southward return of migrants and its implications.
Q. You recently led a large group of
researchers on a binational study
of Mexico–U.S. migration. What’s
behind your finding of unprecedented return migration to Mexico from
the United States?
The U.S. tends to emphasize the
total size of the Mexican immigrant population, which hasn’t grown since 2007.
The other side of the coin, of course, is
what happens in Mexico. In a nutshell,
the total size of the population moving to Mexico from the U.S. has grown
remarkably. In the 2000 Mexican census,
230,000 Mexicans said that their country
of residence had been the U.S. five years
earlier. A decade later, 980,000 replied
similarly. In addition to this fourfold
increase, today’s return migrants tend to
stay in Mexico to a much larger extent
than in previous periods.
The 2010 census also revealed that
there were 739,000 U.S.-born individuals
living in Mexico. Seven out of 10 in this
group are under age 18. A significant portion were born to middle-class Mexican
couples living along the border—holding
U.S. visas and having the ability to pay
for health care—who returned to Mexico
with their newborn. But the rest are
family members of return migrants living
elsewhere in Mexico, not on the border.
Most in this group have little experience
in Mexico. Although their family helps
with integration, they face many of the
same issues with which international migrants elsewhere must deal. We consider
them part of the larger phenomenon of
return migration because their parents

8

were deported or they decided it was
best to return to Mexico.
The 2008–10 economic downturn
and slow recovery is the main reason for
this large return flow to Mexico. Nevertheless, it is also clear to me that many
of those returning would have remained
open to a possible return to the U.S. had
immigration policy not changed.
We tend to hear immigration policy
hasn’t changed, but it has. Widespread
immigration enforcement is a new policy. Returns and removals have been at
their highest levels since 2005, and many
of these individuals face a mandatory
prison sentence if they are caught again
in the U.S. That, along with state and local
enforcement, interagency cooperation
regarding immigration, and a sluggish
U.S. recovery in construction and other
higher-paying, lower-skill industries has
kept return migrants in Mexico.
A minor but positive trend is that the
number of temporary work visas issued
to Mexicans has increased. Workers prize
these visas, which were not valued when
crossing the border was low-risk and
penalty-free.

Q. Who are the return migrants and
how well do they do once they are
back in Mexico? Does it matter
whether the return was forcible or
voluntary?
We have interviewed families who
planned their return carefully, got all
their papers in order, successfully enrolled their children in Mexican schools
and signed up for Mexican free health

insurance and other social services.
Mostly, these families delayed their
return until they were sure they had jobs
in Mexico.
But there are others. Many were
deported and had no official Mexican
identity papers. They needed the Mexican embassy in the U.S. to certify their
children’s birth certificates or school
records. This is a lengthy process. Certifying U.S. school records in Mexico can be
extremely complicated and expensive,
and sometimes requires children and
teenagers to pass Mexican proficiency
tests that are neither widely available nor
easily understood for someone coming
from the U.S. education system.
And there are a large number of
youth who were forcibly returned, some
with no work experience and some after
serving a jail sentence in the U.S. These
individuals are at significant risk, and
some carry out illegal activities in Mexico. Nevertheless, our study found that in
Mexico, U.S.-born children of Mexicans
is one of the groups with the highest high
school enrollment rates. Meanwhile, the
Mexican-born children of migrants who
frequently cross the border are among
those with the lowest enrollment rates.
This illustrates the diversity of the return
migrant group.
Two observations are worth
additional study. First, the poverty rate
in Mexico would be lower today if the
return-migration population had not
been so large, or if the potential migrant
population had left Mexico. Second, farm
employment in many of the areas from
which migrants originated has expanded significantly in the last four or five
years. But our fieldwork shows there is
no simple relationship between returns
and farm employment. For example,
in Jalisco, many farm jobs traditionally
performed by locals have already gone
to migrants from poorer states in Mexico
who have already settled in the agricultural export and tequila industries.
Call-center jobs are staffed to a large
extent by U.S.-born youth whose families
brought them back to Mexico. Jobs requiring good English are now often in the
hands of people who actually do speak
good English, which wasn’t the case until
recently.

Southwest Economy • Federal Reserve Bank of Dallas • Fourth Quarter 2013

the 2000 Mexican census, 230,000 Mexicans
}“In
said that their country of residence had been the
U.S. five years earlier. A decade later, 980,000
replied similarly.”

Q. What does the Mexican government do to help return migrants? Do
children get back into school?
There are contradictory claims
and pressures on the Mexican government, and local government incentives
often run counter to migrants’ interests. Mexican identity papers were
relatively easy to come by in the past.
However, pressure from the U.S., the
war on organized crime and a growing,
often-undocumented immigrant population in Mexico have prompted tighter
requirements for most official identity
documents. This complicates entry into
schools or the formal job market.
Unfortunately, the plight of return
migrants has not impacted Mexican
policy in a consistent way. We interviewed officials of the free public health
program, who confidently stated that
U.S.-born children of return migrants
are ineligible. And school officials often
have the last say regarding who qualifies or what papers are required. Often,
schools require original documents,
which is a problem for someone who
only got one or two copies before leaving the U.S. Mexico’s main cash transfer
program for poor families is more open,
and enrollment is centralized, but U.S.born children still need official documents certified by the U.S. government
or by the Mexican embassy in the U.S.

Q. Are there data on attitudes
toward return migrants among other
Mexicans?
There are no national surveys on
Mexicans’ attitudes toward the return
migrants, although some are under way.
There was, however, a 2009–10 national

survey commissioned by [the magazine]
Este País showing that general attitudes
toward international immigrants are
not positive. Professional immigrants of
European stock were seen as enjoying
an unfair advantage among employers. Conversely, in Southern Mexico,
poor Central Americans are the target
of the same feelings and attitudes poor
Mexicans encounter in the U.S. They are
seen as competing with poor Mexicans
for jobs.

Q. As migration has slowed from
Mexico to the U.S., Central American migration appears to have
picked up. Do some Central Americans stay in Mexico?
Some are staying, although official
immigration figures still show few have
acquired Mexican residence. For most
would-be “transmigrants,” staying in
Mexico is a relatively poor choice, but
one that they are increasingly opting for
because of the risks of traveling further
north. The Mexican labor market and
pay levels are better than in most Central
American countries, and many migrants
can’t go home because violence in their
countries is much worse than in Mexico.
They have to perform informal jobs since
they cannot get residence permits, which
require they have a job and an address.
The larger picture shows that Central American transmigration or immigration to Mexico is part of a regional
migration movement that is not Mexico’s
sole responsibility. The entire Central–
North American labor market is being
reconfigured.

Q. We have read accounts of more
European and Asian migration to
Mexico. How has migration to Mexico changed in recent years?
There are many kinds of flows. For
example, Mexicans who married Central
Americans in the U.S. are returning to
Mexico with their families, not usually
to Central America. Official immigration

figures show small Asian and European
numbers. There are no sources allowing
us to distinguish, for example, European professionals arriving on work visas
from students who secure Mexican
scholarships, tourists who decide to stay
or Asian company workers and their
families.

Q. What does your research suggest
has been the impact of the violence
in Mexico on migration to the U.S.?
Our research shows that higher
homicide rates correlate with falling
emigration. This seems to be because
traveling long distances in unsecure
regions became much riskier. In these
regions, families tend to receive higher
remittances, possibly reflecting deteriorating incomes due to crime.
Along the border, higher violence
correlates with elevated emigration
levels, as one would expect.
Violence seems to be abating,
although we cannot expect it to fall
rapidly. Criminal mafias have secured
footholds in legal businesses and local
government. Crime rates are falling in
many of the previous hot spots, often
dramatically. But this sometimes means
those groups moved elsewhere. Most of
Mexico is still safe, however, and violence
is lower than is often perceived.

Q. If the Mexican president’s reform
agenda is successful, how might
that impact emigration?
We are currently experiencing the
end of the Mexican honeymoon with the
return of the PRI [Institutional Revolutionary Party]. The government, which
for the first time could get congress to
pass major reforms, still hasn’t been able
to pass and implement them as planned.
The new government will have to prove
its reforms make sense, provide more
growth and reduce inequality. If it does,
of course, Mexican emigration will find a
natural, market-led course.

Southwest Economy • Federal Reserve Bank of Dallas • Fourth Quarter 2013

9

Noteworthy
National Defense: Texas Contractors May Feel New Sequester Cuts

T

exas, the second-largest recipient state for Defense Department prime award contract dollars,
may experience more than a hiccup if a second round of sequestration-tied federal budget cuts
proceeds throughout fiscal 2014, which began Oct. 1, 2013. Companies in the state were awarded
$20.4 billion in fiscal 2013 and trailed only firms in Virginia, home of the Pentagon, with $23.3 billion,
department data show. Larger, multiyear projects were largely spared during the initial round of cuts.
Texas could lose almost $6.5 billion in defense contractor revenue over 10 years, the third most behind California and Virginia, Pew Charitable Trusts estimated last year. Of the top 10 largest defense-related companies in the world as identified by the Stockholm International Peace Research Initiative,
seven are represented in the Dallas–Fort Worth area. The companies make a variety of aviation, electronic
and communications products, and most employ skilled workers.
Tarrant County, which includes Fort Worth, has an especially significant concentration of defense
contractor-tied employment. Lockheed Martin, which has almost 15,000 workers and is the county’s
third-largest employer, is ramping up production of its next-generation F-35 aircraft. The $391 billion,
multiyear program is one of the Pentagon’s most ambitious.
—Michael Weiss

income: Despite Gains, Texas Still Trails U.S. in Key Measures

T

hree years after the recession ended, real (inflation adjusted) median household income improved
for the first time in Texas and stopped declining in the U.S. Nevertheless, other economic benchmarks show Texas still trails the nation.
Texas’ real median household income grew 0.8 percent to $50,740 in 2012, the first increase since
2008, according to the Census Bureau’s American Community Survey. Nationally, median income was
essentially flat, up 0.1 percent to $51,371. San Antonio recorded the largest increase in median household
income among the 25 most-populous metropolitan areas in 2012, up 3.8 percent to $51,486.
The rise helped the Texas poverty rate decline to 17.9 percent in 2012 from 18.5 percent in 2011, while
the nationwide poverty rate remained unchanged at 15.9 percent. The Texas poverty rate fell for the first
time since the recession, narrowing the gap with the national poverty rate.
Not all the news was as positive. Texas continues to lead the nation in the share of residents who lack
health insurance. The proportion of uninsured Texans increased 0.9 percentage points to 24.6 percent in
2012, while the U.S. rate declined 0.3 percentage points to 15.4 percent. Texas, Nevada, New Mexico and
Florida are the only states in which more than one-fifth of residents don’t have health insurance.
—Christina English

Border: Staffing at Crossings Adds to GDP, Study Says

C

ustoms and immigration agent staffing at the nation’s ports of entry has far-reaching economic
impacts, according to a University of Southern California study supported by the Department of
Homeland Security. The department, which didn’t endorse the findings, oversees Customs and
Border Protection (CBP) operations.
Each officer added to existing staff at a port of entry is associated with an annual $2 million increase
in gross domestic product (GDP) and 33 additional jobs. Most of the economic benefits associated with
the additional staffing would come from shorter queues in ground passenger travel, with only a small
contribution—about $120,000 in GDP and one job—from facilitating truck freight transportation.
The study finds that cuts in staffing levels similarly have significant implications for the flow of
legitimate travel and commercial activity across U.S. borders. CBP agents temporarily avoided mandatory
furloughs and the loss of overtime hours due to budget sequestration in fiscal 2013. Staffing was largely
unaffected by the partial federal government shutdown in October, though paychecks were delayed. The
department’s 2014 budget allows for a record 25,252 officers, adding 1,600 through appropriations and
1,877 through proposed user fee increases.
—Melissa LoPalo

10

Southwest Economy • Federal Reserve Bank of Dallas • Fourth Quarter 2013

Spotlight

Energy, Trade in Southern New Mexico
Lift State’s Economic Performance
By Avilia Bueno and Roberto A. Coronado

N

ew Mexico has struggled to
keep pace with the nation’s
rebound from recession. As of
August, the U.S. had recovered
78 percent of the 8.7 million jobs lost
in the downturn. By comparison, New
Mexico added back just 25 percent of
the 51,700 jobs it lost.
But the New Mexico story has several parts. Job growth in the southern
portion of the state has been particularly brisk, the result of robust energy and
trade sectors (see chart).1
Spurred by high energy prices and
hydraulic fracturing in the Permian
Basin’s shale formation, southeast
New Mexico’s Eddy and Lea counties
have stood out. Crude oil production
in the state totaled about 84.4 million
barrels in 2012, and Eddy and Lea took
the lead, producing 44 million and
35.8 million barrels, respectively.2 In
addition to oil, production of commodities such as potash (a mineral used in
fertilizer) has been rising and is likely
to bring considerable investment to the
region in coming years.

Employment grew 2.2 percent in
Eddy and 3.2 percent in Lea from August 2012 to August 2013, significantly
more than the 1.1 percent rate for New
Mexico overall and the 1.6 percent
figure for the nation. The August unemployment rate was a remarkably low 3.9
percent in Eddy and 3.8 percent in Lea,
compared with 6.8 percent statewide.
New Mexico’s 42 percent export
growth rate led the nation from 2011 to
2012. Israel was its biggest destination
market, on the strength of production
from a Rio Rancho Intel semiconductor plant. Mexico was next, with 20
percent of the state’s total exports. The
biggest segment of state exports to
Mexico is industrial inputs and components shipped to maquiladoras in
the northern part of the country. Total
exports to Mexico in 2012 were valued
at around $618 million, a small amount
compared with other border states,
such as Texas at $94.8 billion and Arizona at $6.3 billion.
Traditionally, New Mexico’s
manufacturing base has been centered

Employment Shows Strength in Southern New Mexico
Index, January 2006 = 100

108
Southern N.M.

106
104
102

NEW MEXICO

Albuquerque

LEA
EDDY

SANTA
TERESA

El Paso

TEXAS

around Albuquerque, the state’s largest
metropolitan area. However, within the
last 10 years, the Santa Teresa Port of
Entry on the border has seen significant
public and private infrastructure investment, which will aid its emergence
as a major export platform to Mexico.
Southern New Mexico’s economic
fate is tied to oil and the global economy. As long as oil prices remain near
current levels, drilling in the western
Permian Basin will continue. Meanwhile, economic activity in Santa Teresa
will be shaped mostly by Mexico, whose
economy faces significant headwinds
but improved prospects in 2014.3
While southern New Mexico may
face challenges in the coming months,
the region is likely to continue to shine
as the rest of the state economy slowly
mends.

Notes

100

For more details, see “Southeast New Mexico Shines
as State Economy Slowly Mends,” by Avilia Bueno and
Roberto A. Coronado, Crossroads, Issue 1, 2013.
2
For more details on energy production in the Permian
Basin, visit www.dallasfed.org/research/econdata/permian.
cfm.
3
For a more recent discussion of Mexico economic trends,
see www.dallasfed.org/research/update/mex/index.cfm.
1

98
96

Northern N.M.

94
92

2006

2007

2008

2009

2010

2011

2012

2013

SOURCE: Bureau of Labor Statistics.

Southwest Economy • Federal Reserve Bank of Dallas • Fourth Quarter 2013

11

Barbecue vs. Gumbo: Economic Traits
Tie Neighboring Texas and Louisiana
By Jason Saving and Michael Weiss

E

ven with a legacy of cultural
differences as varied as their
native cuisines, Texas and
Louisiana still have much in
common.
They are geographically contiguous, a roughly 240-mile border running
between them, and they adjoin the
Gulf of Mexico, from which some of
the nation’s busiest ports operate. They
share a geology that begins in East
Texas and extends through Louisiana,
with vast deposits of fossil fuels and a
regional topography that doesn’t rise
much above sea level. They also share a
few historical traits, having been under
the rule of many of the same entities,
including Spain and the Confederacy.
Yet the states are perceived in
radically different ways. Texas is often
depicted as a fast-growing paragon of
economic wherewithal, a hotbed of
entrepreneurial initiative and opportunity. Louisiana is much less frequently
described in such terms, though it’s
lauded for its unique culture and
customs.
Economic and population statistics point up their differences. More
than five Louisianas (52,271 square
miles) could fit into one Texas (268,820
square miles). While Texas is the nation’s second-most populous state (and
growing), with 26.1 million residents
as of 2012, Louisiana is 25th-most
populous, with 4.6 million people, a
base it has struggled to expand since
Hurricane Katrina struck in 2005.
Texas’ economic output, reflected
in its real gross domestic product, has
more than doubled since 1990; Louisiana’s is just one-third larger over the
period (Chart 1).
Texans’ well-being has improved
relatively more, with personal income
rising 42 percent since 2000 versus 33
percent next door.

12

Income growth accelerated in
Texas beginning in 2010, coinciding
with expanding shale oil and gas exploration. Until 2010, personal income in
the two states grew similarly—sometimes more in one than in the other, as
in Texas during the 12 months immediately after Hurricane Katrina and in
Louisiana during the year after that as
rebuilding took hold.
In the last 30 years, as energy
boomed, busted and boomed again,
Texas diversified economically into the
service sector and “knowledge” fields
such as information technology; Louisiana largely stayed the course, albeit
while overcoming the devastation of
Katrina, one of the worst natural disasters to hit the U.S.1 The shale energy
revolution, providing new exploration
and resource opportunities for both
states, may offer Louisiana a new economic impetus for accelerated growth.
As is often the case, broad-brush
overviews, while providing useful perspective, may overlook some subtleties.

Chart

1

In reality, some of the same factors
drive economic growth in Texas and
Louisiana. While there are real differences between the two states—barbecue versus gumbo—a closer examination of those factors is particularly
revealing.

Assessing Business Climate
One place to start is the states’
overall economic environment. All
other things equal, economists have
generally found that better business
climates bring faster economic growth
and, thus, more opportunities for
workers and firms, though many other
factors play a role. How do the two
states stack up?
Data support the popular perception that Texas presents its residents
with fewer economic constraints than
the average state. The nonpartisan
Fraser Institute’s annual rankings, for
example, place Texas second among
the states for business-friendly climate.
The measurement, derived from a

Real Gross Domestic Product Growth

Index, 1990 = 100

230

Texas

210
190
U.S.

170
150

Louisiana

130
110
90
70

1990

1992

1994

1996

1998

2000

2002

2004

SOURCE: Bueau of Economic Analysis.

Southwest Economy • Federal Reserve Bank of Dallas • Fourth Quarter 2013

2006

2008

2010

2012

10-point scale measuring 10 characteristics, broadly covers size of government, tax policies and labor market
regulations (Chart 2).
Texas scores well primarily because of government’s relatively small
share of the economy and the relatively
small per capita transfer payments
disbursed for welfare and nutrition
programs, bolstering the amount of
resources remaining in the hands of
individuals and businesses to consume
or invest as they see fit.
Louisiana isn’t far behind, however. Its business climate ranks seventh,
scoring above the national average in
Fraser’s three general categories—government, taxes and labor relations.
However, Louisiana’s scores over the
sample period (2001–07) were much
more volatile than Texas’, suggesting
Louisiana firms faced a somewhat less
certain business environment over that
period.
Outside of Fraser’s measurement,
legal idiosyncrasy can also play a role—
though a difficult-to-quantify one—in
an area’s business environment.
Louisiana’s adherence in noncriminal
matters to a form of the Napoleonic
Code—not unlike another former
French colony, Quebec—gives greater
weight to custom and adherence to a
broad civil code than does the com-

Chart

2

mon-law framework practiced in Texas
and elsewhere in the U.S. The predominant framework relies more on legal
precedent.2 The difference can present
a challenge to doing business in Louisiana without local counsel.

The ‘Skill Premium’
But putting one’s state on a better
growth path over time is not simply
about trimming government and
making the system more transparent.
In a global economy characterized by
ever-increasing levels of competition,
human capital has emerged as an
ever-more-important determinant of
growth.
The “skill premium” between highly and less-well educated workers has
grown substantially, and there is every
reason to believe it will continue to do
so. This means the education system
(particularly grades K-12), which is
primarily state run and state funded,
has a profound impact on longer-term
growth by directly affecting students’
higher-education outcomes.
U.S. states spent on average
$10,580 per student on K-12 education
in 2011 (the last year for which full data
are available) (Chart 3). Texas spent 18
percent less than the national average
over that period, placing it 43rd. Louisiana, on the other hand, spent 1 percent

a global economy
}Incharacterized
by everincreasing levels of
competition, human
capital has emerged as
an ever-more-important
determinant of growth.

Texas, Louisiana Rate High in Business Climate Index

2010 score (1 to 10 scale)

9
8
7
6
5
4
3
2
1
0

e
are exas rado rgia olina tah iana vada shir ssee aska kota rage rnia York ginia
U uis
T olo
e mp
eo Car
ir
ne ebr h Da ave alifo ew
N
G
n
o
a
C
tV
N ut ate
C
L
H
N
Te
es
rth
o -st
w
o
e
W
S
N
N
50

law

De

SOURCE: Fraser Institute.

Southwest Economy • Federal Reserve Bank of Dallas • Fourth Quarter 2013

13

more than the average, $10,723, ranking it 23rd. (New York was the highest,
$19,067, and Utah the lowest, $6,212.)
However, funding is not the only
determinant of educational success,
and broader measures suggest the
states are on more equal footing than
might be implied by the spending
figures. Despite its above-average
per-capita education spending, Louisiana ranks 48th in student performance,
as measured by results for fourth-grade
math competency in the nation’s
premier benchmark test, the National
Assessment of Educational Progress
(Chart 4). Texas placed 24th, with
scores that almost mirror the national
average. (Massachusetts was No. 1 and
Mississippi No. 50.)
Infrastructure is another factor
helping drive long-run economic
growth. Texas, with its sprawling size,
spends $7.9 billion per year on its highways, the second-highest amount in
the nation, but its per-capita spending
level of $319.41 puts it 8.5 percent below the national average. By contrast,
Louisiana’s $2.1 billion yearly expenditure produces a per capita spending
level of $474.63, nearly 36 percent
above the national average (Chart 5).
The difference may be partially
attributable to Louisiana’s costly and
numerous elevated roads over marshes
and swamplands, such as the 18-mile
Atchafalaya Basin Bridge on Interstate
10 between Baton Rouge and Lafayette.
Again, total spending doesn’t tell
the whole story. The most recent Annual Highway Report finds that Texas
roads and bridges were the 11th best
in the nation, though its urban congestion was 4 percent above the national
average and its overall fatality rate was
17 percent higher than the national
norm. Louisiana’s state highway system
was ranked 35th, with an even higher
fatality rate and a 71 percent greater
likelihood that any given mile of interstate highway will be in poor condition.

Ports of Plenty
Texas and Louisiana have historically been open to waterborne trade.
From the days when cotton was exported from New Orleans and Galveston, to

14

Chart

3

Texas Trails Louisiana, Nation in Spending Per Pupil

Rank/state

NY
DC
AK
NJ
VT
WY
CT
MA
MD
RI
LA
US
43 TX
1
2
3
4
5
6
7
8
9
10
23

Louisiana
U.S.
Texas
0

5,000
10,000
15,000
20,000
Elementary/secondary spending per pupil (dollars)

25,000

NOTE: Based on rankings of the 50 states plus the District of Columbia.
SOURCE: Census Bureau.

Chart

4

Louisiana Trails Texas, Nation in 4th Grade Math Testing

Rank/state

MA
NH
MN
NJ
MD
VT
KS
PA
VA
ND
TX
US
48 LA
1
2
3
4
5
6
7
8
9
10
24

215

Texas
U.S.
Louisiana
220

225

230

235
240
Average score

245

250

255

260

NOTE: Based on rankings of the 50 states plus the District of Columbia.
SOURCE: National Center for Educational Statistics, 2011.

more recent times, when petrochemicals and petroleum products have
flowed from ports along the Gulf Coast,
geographic happenstance ensured that
waterborne trade would become a key
component of both states’ economic
well-being. This is evident in an examination of port tonnages, with nine of
the nation’s 12 largest ports—including the two largest—found in the two
states.
There are also important geographical differences that bear on the
overall trade picture in the two states.
Mexico’s opening to trade and emergence as a player in the international
economy have greatly expanded the

movement of goods in recent years,
a trend that has disproportionately
benefited its largest trading partner,
Texas. Exporters have to some degree
also chosen to locate in Texas due to its
proximity to Mexico, causing Texas to
surpass more-populous California as
the nation’s largest exporter. Louisiana has participated in this boom to a
much lesser extent.
Reflecting these differences, more
than one-third of Texas exports flow to
Mexico, while Louisiana, which is one
state away from the Mexican border,
exports more goods to China (13.2
percent) than Mexico (10.7 percent)
(Chart 6).

Southwest Economy • Federal Reserve Bank of Dallas • Fourth Quarter 2013

The relatively limited trade relationship with Mexico has also contributed to Louisiana exporting a more
narrow composition of goods than
Texas. For example, over 29 percent of
Louisiana exports are petroleum products versus a smaller but still-large 13
percent for Texas. One-third of Louisiana exports are corn and soybean
products, many arriving for loading
from growing states upstream along the
Mississippi River; Texas has comparatively little agricultural pass-through.
Still, both states make a disproportionately large contribution to total U.S.
exports—17.1 percent of U.S. exports
come through Texas even though only
8.1 percent of the U.S. population resides in the state, and 4.1 percent come
through Louisiana even though only 1.5
percent of the population lives there.

Investing in the Future
Texas and Louisiana are geographic neighbors that share many characteristics and face many common challenges. From their roots as southern
states whose fortunes were closely tied
to export markets, each has in its own
way emerged as an important player
on the global economic stage.
Perhaps the single-largest challenge ahead for both states lies in investing in human capital by improving
and expanding education. As globalization and technological change skew
U.S. labor demand toward high-skill

Chart

6

Chart

5

Louisiana Tops Texas in Per Capita Highway Spending

Dollars

2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0

U.S.

Rhode Island (lowest)

Texas

Louisiana

Alaska (highest)

SOURCES: Census Bureau; Federal Highway Administration.

occupations, state education systems
will need to rise to the challenge.
Especially in Louisiana—a state
that receives relatively little domestic
in-migration and also relatively few
immigrants—policymakers will face
substantial pressure to improve the
K–12 education system or watch jobs
leave to neighboring jurisdictions.
Such short-term pressure is
somewhat less in Texas due to the large
number of well-educated immigrants it
receives from other states and nations
and to the relatively high number of
immigrants from points south who are
willing and able to enter lower-skill
occupations. But Texas will also need
to improve the quality of its public

schools over the long run if it is to
move up the value-added ladder.
Saving is a senior research economist
and advisor and Weiss is a senior
writer/editor in the Research
Department of the Federal Reserve
Bank of Dallas.

Notes
See “The Economic Aftermath of Hurricane Katrina,” by
Jacob Vigdor, Journal of Economic Perspectives, vol. 22,
no. 4, 2008, pp. 135–54.
2
See “The Civil Codes of Louisiana,” by A.N.
Yiannopoulos, Civil Law Commentaries, Tulane University
Law School, vol. 1, Winter 2008. Also, “Louisiana Begins
to Slip Its Legal Ties to France,” by Lis Wiehl, New York
Times, Oct. 13, 1989.
1

Top Export Destinations: Texas vs. Louisiana
(Value of total exports, percent)
Louisiana

Texas
Mexico, 35.7

Other, 25.9

China, 14.8

Other, 35.7

Mexico, 10.3
Saudi Arabia, 1.5
U.K., 1.6
Chile, 1.6
Belgium, 1.6
Japan, 1.8
Colombia, 2.1
Singapore, 2.4
South
Netherlands,
Venezuela, 2.6
Korea, 2.9
3.6

Japan, 6.1
Netherlands, 5.4
Canada, 9.0
China, 3.9
Brazil, 3.8

Venezuela, 2.0
Germany, 2.1
South Korea, 2.1
Colombia, 2.3
Egypt, 2.5

Canada, 4.2

Gibraltar, 2.6

Brazil, 3.6
Singapore, 3.6
Chile, 2.7

SOURCE: Census Bureau, 2013.

Southwest Economy • Federal Reserve Bank of Dallas • Fourth Quarter 2013

15

Shale Revolution Feeds Petrochemical
Profits as Production Adapts
By Jesse Thompson

marriage of
}The
advanced techniques for
horizontal drilling and
hydraulic fracturing has
helped reverse 30 years
of declining domestic
production of oil, natural
gas and natural gas
liquids.

16

B

ooming natural gas production from shale has undeniably benefited U.S. petrochemical production and
profitability. New energy supplies from
shale have been so abundant that prices
for natural gas and coproduced natural
gas liquids, or NGLs, have rarely been
lower, helping reduce overall costs.
At the same time, oil and its
by-products have rarely been higher. The price differential has driven a
shift wherever possible from heavier
raw-material inputs—oil by-products
such as naphtha—to lighter inputs,
including NGLs. Since 2011, the preference for NGLs (ethane, propane and
butane) has placed sectors dependent
on heavy-material inputs at a competitive disadvantage.
The ability to tap directly into shale,
the “source rock” from which many
hydrocarbons have slowly percolated for eons, has been revolutionary.
The marriage of advanced techniques
for horizontal drilling and hydraulic
fracturing has helped reverse 30 years
of declining domestic production of
oil, natural gas and natural gas liquids.
Texas has played a starring role in the
transformation.
The Barnett Shale in North Central
Texas, the Haynesville in East Texas and
Northern Louisiana, the Permian Basin
in West Texas (containing several shale
formations) and the Eagle Ford in South
Central Texas have been leading centers
of activity. The Eagle Ford—which lies
within 200 miles of the Gulf Coast—is
particularly important to the petrochemical industry. Most U.S. petrochemical capacity resides on the Gulf
Coast, and the Eagle Ford is especially
rich in industry-favored NGLs.
For every thousand cubic feet
(Mcf) of natural gas extracted in the
Eagle Ford, six to nine gallons of NGLs

were produced in 2011.1 That figure
suggests that the Eagle Ford was likely
responsible for as much as 27.7 million
gallons per day of NGL production from
January to August 2013—representing
at least 20 percent of all NGLs produced
in the U.S. The latest production rate
compares with 2.9 million gallons per
day in 2010.2 The average amount of
NGLs separated from the natural gas
stream has likely increased since 2011
as low natural gas prices encouraged
redeployment of drilling rigs to areas
with higher concentrations of NGL and
oil reserves (Chart 1).
Beyond a resurgence in the petrochemical industry, the production increase and lower NGL cost are responsible for a shift that has favored some
products over others. Petrochemical
producers seeking to exploit this competitive advantage have begun a wave of
heavy construction that is expected to
last the next several years, shifting trade
balances and creating jobs.

Fewer By-Products
The primary building block of
the global petrochemical industry is
ethylene, produced in plants called
crackers—factories that break up, or
crack, whatever they’re fed into different
substances. Ethylene, an intermediate
chemical, is used to make other products as varied as plastic packaging, PVC
(polyvinyl chloride) pipe for construction, and cell phones. Different inputs
(feedstocks) can be sent to a cracker:
lighter feedstocks such as ethane (the
most common component of NGLs),
or heavy feedstocks like naphtha (an oil
by-product).
Ethane is a simple molecule and
can only “crack” in a limited number of
ways. Roughly 80 percent of ethane fed
into a cracker is converted to ethylene,
and most of the remainder is converted

Southwest Economy • Federal Reserve Bank of Dallas • Fourth Quarter 2013

Chart

1

Eagle Ford Drilling Shifts from Natural Gas as Prices Fall

Percent of rigs

Dollars/Mcf gas

7

6

6

Natural gas price

5

5
4

4
3
3
2

Rigs drilling for gas

2

1

1
0
2/4/11

0
5/4/11 8/4/11 11/4/11 2/4/12 5/4/12 8/4/12 11/4/12 2/4/13 5/4/13 8/4/13

SOURCES: Energy Information Agency; Baker Hughes.

into fuel gas, which is a mix of fuels that
are gaseous at surface conditions and
can include methane, hydrogen and
carbon monoxide. Naphtha, however, is
a soup of much more complex molecules and can, accordingly, crack in
more ways. Only about 23 percent of the
naphtha fed into a cracker is converted
to ethylene. The majority of that naphtha
is turned into a laundry list of intermediate chemical by-products (Chart 2).3
U.S. producers have reacted to the
declining domestic price of NGLs—a
result of booming shale production—

Chart

2

and the rising global price of oil-tied
naphtha by dramatically shifting to light
NGLs in their crackers. The swing from
naphtha has been remarkable for an
industry that had previously anticipated
rising—not falling—natural gas prices
in the coming decades. From 2001 to
2005, the share of U.S. cracker capacity
that was fed NGLs declined from 75.4
percent to 67.9. It remained at relatively
low levels through 2007. But by the first
half of 2013, 90 percent of U.S. cracker
capacity was fed NGLs.4 This move has
made the U.S. industry highly profitable

Refinery Inputs Changing

Feedstock Yields

Naphtha

Ethane
Butadiene
1%

Gasoline
1%

Fuel gas
13%

Ethylene
23%

Gasoline
18%
Ethylene
80%

Butylene
2%

and globally competitive.5 It also caused
domestic shortages and record prices
for the other products yielded from outof-favor naphtha.
A wide assortment of products are
affected by these domestic shortages—
such as propylene (used in synthetic
fibers for clothes, rigid packaging and
plastic bottle caps), butadiene (used
in car tires) and a group of chemicals
known as BTX and often referred to as
aromatics (used in Styrofoam cups, in
solvents such as acetone and in gasoline
formulations).6
Butadiene was in short supply
event before the shale revolution.
Inflation-adjusted U.S. butadiene prices
have nearly doubled every five years
over the past 15 years, averaging $1,778
per ton in 2012, as global demand for
rubber grew.7 The price of propylene,
meanwhile, averaged $849 per ton from
2000 to 2010 and jumped to $1,463 per
ton from 2011 through the first half of
2013.8 The price of benzene (the “B”
in BTX) reached a high late last year,
averaging $1,426 per ton, a 109 percent
increase from 2008 and a 97 percent rise
from the 2000–10 average.9
Furthermore, the profits of manufacturers of many products derived from
heavy by-products, such as packaging
and plastic parts, have been squeezed
by volatile materials costs and competition from substitutes made from
shale-advantaged NGL-based ethylene.

Propylene
3%
Propylene
13%

Fuel gas
27%
Butadiene
4%

Butylene
15%

NOTE: BTX is included in gasoline totals.
SOURCE: Petrochemicals in Nontechnical Language, by Donald L. Burdick and William L. Leffler, Tulsa, Okla.: PennWell
Publishing, 2010.

Refineries are affected as well.
While they tend to keep the average
characteristics of the oil they use within
a narrow band—a mix of light, sweet oil
and heavy, sour crude—supplies have
shifted since 2008 as lighter, lower-cost
shale oil came to market. Shale oil on
average is 12.5 percent lower in aromatics content than the typical U.S.
refinery mix had been when oil imports
were greater.10 A lighter mix can impact
refinery yields, similar to how it affects
cracker output. Taken together, refineries and crackers provide more than
two-thirds of the nation’s BTX supply.
With lighter feeds for crackers and with
shale oil going to refineries, the domestic supply of aromatics has dropped by

Southwest Economy • Federal Reserve Bank of Dallas • Fourth Quarter 2013

17

propane and
}Increased
butane exports would
help bring regional and
global prices into better
balance.

an estimated 20 percent.11
The story for refinery aromatics
doesn’t end there. Several demand
factors contributed to lower production
of aromatics, specifically benzene.
First, demand for higher-octane
fuels has fallen in recent years, reducing
the need for high-octane blending components, some of which contain benzene. Second, environmental concerns
in the U.S. and abroad have reduced
the amount of allowable aromatics,
benzene in particular, in gasoline. Third,
the requirement that refiners blend
high-octane ethanol (typically made
from corn) into gasoline reduces the use
of benzene-rich blending components
in gasoline.12 Finally, gasoline consumption has declined since its peak in 2007,
due in part to the Great Recession, a
slow recovery and more-fuel efficient
cars. Gasoline exports have bolstered
U.S. gasoline production. Gasoline export production peaked in 2011 at 174.8
million barrels and was 149.7 million
barrels in 2012. The annual average
from 2000 to 2010 was 53.9 million
barrels.

Trade Shifting
Meanwhile, imports of shale-disadvantaged chemicals into the U.S. have
increased. Net imports of butadiene and
isoprene have grown 167 percent since

Chart

3

2009, while net imports of BTXs over that
same period increased 3,700 percent,
albeit from a very low level (Chart 3).13
The Texas share of BTX imports
into the U.S. was 43.3 percent in 2007
and 28.5 percent in 2012—15.1 percent
for butadiene and 18.1 percent for isoprene. While these chemicals represent
smaller markets than ethylene, they
make up a vital part of the U.S. chemical
industry. North American propylene,
butadiene and benzene production
combined was equal to 80 percent of the
total tonnage of ethylene in 2007, when
production peaked prior to the shale
revolution.14
Potentially working against the
overall shift are impending increases in
export capacity for NGLs, particularly
propane and butane, which are less
expensive to ship than ethane and natural gas. A limited ability to export has
driven down local NGL prices, prompting several firms to seek to significantly
boost export capacity along the Texas
Gulf Coast. Increased propane and butane exports would help bring regional
and global prices into better balance.
Producers would benefit, though the
increased demand—and the higher
prices it would bring—could make domestic products derived from propane
and butane less competitive than they
otherwise would have been.

Net Chemical Imports Rise on Domestic Shortages

Thousands of kilograms

Thousands of liters

600,000

200,000
150,000
100,000
50,000

400,000
Butadiene and isoprene
(12-month moving average)

200,000
0

0
–50,000

BTX (12-month moving average)

–200,000

–100,000
–400,000

–150,000
Jan. ’96
July ’96
Jan. ’97
July ’97
Jan. ’98
July ’98
Jan. ’99
July ’99
Jan. ’00
July ’00
Jan. ’01
July ’01
Jan. ’02
July ’02
Jan. ’03
July ’03
Jan. ’04
July ’04
Jan. ’05
July ’05
Jan. ’06
July ’06
Jan. ’07
July ’07
Jan. ’08
July ’08
Jan. ’09
July ’09
Jan. ’10
July ’10
Jan. ’11
July ’11
Jan. ’12
July ’12
Jan. ’13

–200,000

SOURCE: International Trade Commission.

18

Southwest Economy • Federal Reserve Bank of Dallas • Fourth Quarter 2013

–600,000

Planned Investments
The petrochemical industry’s confidence in the low-price outlook for light
NGLs underlies announcements of new
U.S. plants and expansions that would
increase capacity 33 percent by 2017
should they all be completed.15 Faced
with a longer-run prospect of highpriced imports and cheap, domestic
NGLs, the economics of producing at
least propylene—now in short supply—
through a different process has become
more attractive.
Rather than rely on propylene
production as a by-product of crackers
geared for ethylene, producers have
announced eight construction projects dedicated to making propylene
(Table 1).16
The announced capacity is expected to largely replace the output lost
when naphtha became a less-profitable
feed. With some construction already
underway, many in the industry wonder
if all the planned facilities will be built
or completed on schedule. The permit
process can take two years, and industry
contacts are chafing at delays already
encountered. Once projects start, the
rule of thumb for major facilities has
been four years of construction. However, there are indications that construction markets are tight—the supply of
skilled trades personnel is a constant
concern given the scale of demand.
Last year, construction workers
with specialized skills building plants
along the Gulf Coast earned as much
as $40 an hour. With wage pressures
mounting, substantial cost increases
loom. Thus, the wave of heavy petrochemical construction starts will likely
approach more slowly than the announced time frames suggest.

Long-Run Texas Benefits
While the U.S. shale revolution has
provided cheap NGLs to feed petrochemical plants—making the plants the
most profitable they’ve been in at least
10 years. Other domestic producers
dependent on heavy by-products are
less competitive.
Construction across the Texas Gulf
Coast that includes plants specifically
geared for propylene-based products

Table

1

Planned North American Projects

Company

Propylene capacity
(tons)*

Location

Projected
startup

Enterprise Products

750,000

Texas

Q3 2015

C3 Petrochemicals

New plant

Alvin, Texas

Q3 2015

Dow Chemical

750,000

Freeport, Texas

2015

Williams Cos.

500,000

Alberta, Canada

Q1 2016

Formosa Plastics

600,000

Point Comfort, Texas

2016

New plant

n.a.

2018

Dow Chemical
Enterprise Products

New plant

Texas

n.a.

PetroLogistics

Expansion

Houston

n.a.

* Capacity figures for some planned construction projects have not been disclosed.
SOURCES: ICIS; the companies.

will add needed new capacity, though
the exact amount will depend on many
factors, most notably regulatory requirements. Industries always face economic
trade-offs, and producers have clearly
deemed a petrochemical renaissance—
driven by natural gas and NGLs from
shale—to be well worth the cost of lost
by-products. The Texas economy should
benefit for years to come.
Thompson is a business economist at the
Houston Branch of the Federal Reserve
Bank of Dallas.
Notes
Pricing is most frequently quoted in terms of 1 million
British thermal units, MMBtu, a measure of energy
content. Volumes are often given in terms of a thousand
cubic feet of natural gas, Mcf. See “Flares in the Oilpatch:
Understanding N.D. Infrastructure,” by Trisha Curtis,
Energy Policy Research Foundation Inc., Platts Rockies
Fifth Annual Oil and Gas Conference, April 12, 2012.
2
Production based on figures from the Energy Information
Agency, Texas Railroad Commission and Energy Policy
Research Foundation.
3
See Petrochemicals in Nontechnical Language, by
Donald L. Burdick and William L. Leffler, Tulsa, Okla.:
PennWell Publishing, 2010.
4
“U.S. Olefins First Half 2013: Ethylene Production
Prospects Clouded by First-Half Turnarounds,” by Dan
Lippe, Petral Consulting, Oil and Gas Journal, Sept. 2,
2013.
5
See “Booming Shale Gas Production Drives Texas
Petrochemical Surge,” by Jesse Thompson, Federal
Reserve Bank of Dallas Southwest Economy, Fourth
Quarter, 2012.
6
BTX stands for benzene, toluene and xylene.
7
Prices in Japan have been distorted by the nuclear
disaster, and production in western Europe has been
affected by the recession and U.S. shale boom,
1

complicating attempts to assign a specific portion of the
price increase to constraints on U.S. supply.
8
Data are from Nexant’s U.S. propylene price index.
9
Data are from Nexant’s U.S. aromatics benzene index.
Bloomberg’s price index (in cents per gallon) indicates a
105 percent increase in 2013 over the prior 10 years.
10
BTXs belong to a family of substances called
“aromatics,” which are unsaturated naphthenes.
11
See “Impact of Shale Plays on U.S. Aromatics
Production and Pricing,” Platts U.S., Jan. 10, 2013.
12
By federal mandate, ethanol makes up 10 percent of
gasoline content.
13
Refineries are also large suppliers of BTXs. Thus,
net imports of those products are also affected by their
behavior.
14
Data are from Nexant’s North American production index.
15
See note 5.
16
See “Market Outlook: New PDH Units May Lead
to U.S. Polypropylene Resurgence,” by Michelle
Klump, ICIS.com, April 5, 2013, www.icis.com/
Articles/2013/04/05/9656095/market-outlook-new-pdhunits-may-lead-to-us-polypropylene.html.

Southwest Economy • Federal Reserve Bank of Dallas • Fourth Quarter 2013

19

Snapshot The FOMC’s Lengthening Statements

T

wenty years ago, when the Federal Open
Market Committee (FOMC) decided to alter
the stance of monetary policy by raising or
lowering interest rates, it did not announce
that fact to the general public. Rather, financial
market participants were left to divine what the
FOMC had decided.
Today, when the FOMC decides to change
the stance of monetary policy, it releases a
detailed statement outlining the rationale for its
decisions. The evolution of FOMC communications over the past two decades can be seen in the
word count of the post-meeting statement.
The first one, issued on Feb. 4, 1994, was a
mere 99 words (see chart). The statement issued
after the April 30–May 1, 2013, meeting was 669
words and included—in addition to the committee’s decision about the stance of monetary policy—information on the committee’s assessment

DALLASFED

FOMC Statement Word Counts Increase, 1994–2013
Word count

800
700
600
500
400
300
200
100
0

’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13

SOURCE: Federal Reserve Board.

of economic conditions, the economic outlook and factors likely
to prompt a change in the stance of policy.
—“A Short History of FOMC Communication,” by Mark
Wynne, Dallas Fed Economic Letter, September 2013

Southwest Economy

is published quarterly by the Federal Reserve Bank of
Dallas. The views expressed are those of the authors and
should not be attributed to the Federal Reserve Bank of
Dallas or the Federal Reserve System.
Articles may be reprinted on the condition that the
source is credited and a copy is provided to the Research
Department of the Federal Reserve Bank of Dallas.
Southwest Economy is available on the Dallas Fed
website, www.dallasfed.org.

Federal Reserve Bank of Dallas
2200 N. Pearl St., Dallas, TX 75201

Mine Yücel, Senior Vice President and Director of Research
Pia Orrenius, Executive Editor
Michael Weiss, Editor
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