oil prices

Bruce Zimmerman, CEO of UTIMCO, met with UTIMCO board members Thursday morning. The conference covered topics such as UTIMCO investments and how foreign oil activities may affect the University’s endowment and the Permanent University Fund.
Photo Credit: Griffin Smith | Daily Texan Staff

University of Texas Investment Management Company officials released a report Thursday detailing the effects of falling oil prices on the Permanent University Fund (PUF). 

The PUF is an endowment containing 2.1 million acres in West Texas that was created by the Texas Constitution in 1876 to benefit the UT and Texas A&M University systems.

According to Mark Warner, managing director of natural resources investments, falling oil prices over the course of the last four months slightly hampered the assets UTIMCO manages, which total $34.5 billion. Domestic oil prices declined by 60 percent from a peak in late April 2014 before bottoming out in late November 2014. However, over the five months, the endowment maintained a return of 4 percent.

Bruce Zimmerman, UTIMCO chief executive officer and chief information officer, said the investments made under UTIMCO are made safely to protect the funds that support the UT System schools.

“Our first line of defense is a diversified portfolio because, generally, not everything is going up at the same time, and, generally, not everything is going down at the same time,” Zimmerman said.

Zimmerman said falling oil prices from April to November could actually help raise the endowment’s value.

“Our best guess, our best projection, is that the supply shock — excess supply, lower prices — is actually a slight positive for the endowment,” Zimmerman said. “Now, it’s clearly a negative for the energy industry, clearly a negative for the state of Texas … but this really gets at around 10 percent of our exposure is in energy; 90 percent is outside of energy.”

Zimmerman said only 10 percent of the total investments made by UTIMCO are in the energy industry. The other 90 percent of investments are made in sectors of the economy that ordinarily improve when oil prices decline. For consumers, lower oil prices mean cheaper gas, cheaper goods and more spending money to stimulate the economy.

“Our investment returns, we think, will be slightly helped by the reduction in oil because there are more consumers than producers, and the consumers get a benefit,” Zimmerman said.

Warner, the managing director of natural resources investments, said he looked at the correlation between the value of the energy portfolio, the investments in the energy industry and the price of oil. The report established that, when the price of oil drops, the value of the portfolio drops 10 percent of the price. 

Warner said he has watched the energy industry’s downturn closely.

“What I can tell you is that we’ve looked back at history, particularly the ’08-’09 time frame, and this is historic by any measure,” Warner said.

According to Warner, lenders are more willing to make investments in the current economy because it is much healthier than it was during the 2008 recession. Warner said this makes him feel optimistic about the energy portfolio’s future value.

“We’re hoping our partners are able to be opportunistic; this way, they have the money to do it,” Warner said. “We’re very encouraged by where we are in the cycle and by the partnerships that we have.”

Oil is in a slump and, on its face, that’s a good thing for you and me. Low gas prices mean embracing the fuel extravagances of yesteryear, like leaving your car idling in the parking all night so it’s warm when you drive to class in the morning, or playfully splashing your friends with gasoline at the pump in front of the 7-11. However, there are two sides to every coin, and low prices on crude oil could mean problems for the upcoming state budget with very real implications for UT.

Oil and gas are a huge component of the Texas economy. Although the oil and gas sector accounts for less than 3 percent of Texas jobs, it drives around 11 percent of our economic output. The last major oil bust in the late 1980s demonstrated the devastating effect of cratering commodities on the broader economy when over 700 banks and thrifts failed, according to the Wall Street Journal. Although it’s unlikely we’ll see a repeat of that disaster, many of the same macroeconomic forces behind the bust are at play now. Expansion of oil exploration in West Texas and North Dakota’s Bakken formation have increased domestic supply while internationally a weakened OPEC has done little to reduce production lest they sacrifice their own market share. Abroad, tempered global growth and increased fuel efficiency has decreased demand. All of these factors converge to create the low prices that we see today and are creating a headache for not only oil companies, but also the state legislators who rely heavily on energy price projections to write their budget.

The unfortunate elected official whose most impactful decision will be guessing what oil prices will be over a particularly volatile period is Glenn Hegar, our newly sworn-in comptroller. His office’s Biennial Revenue Estimate has to include a baseline guess of how much money will be available to the state for spending over the next legislative period. Although a barrel of West Texas intermediate crude oil has plummeted from over $100 in May to less than $50 as of this writing, Hegar has projected prices to rise back up to between $65 and $70 on average over the biennium. This means reduced state revenue in the form of taxes on energy and the firms that produce it. This isn’t to say that Texas is expected to economically stagnate in coming years. The Dallas Fed recently predicted that the state economy will continue to grow by 2 to 2.5 percent, less than in recent years and not quite high enough to continue heralding the “Texas miracle.”

If state legislators decide to reduce higher education funding due to strain from reduced energy revenues, this could lead to a bigger tuition bill for students, just as happened in the 2012-2013 biennium when former Comptroller Susan Combs underestimated state revenue. In addition to relying on tax money to pay for the portion of the higher education budget covered by the Legislature, the state’s Permanent University Fund is an endowment contributing to the support of schools in the University of Texas andTexas A&M University Systems, as provided by the state’s 1876 Constitution. The fund’s assets include billions in financial assets as well as 2.1 million acres of land (and mineral rights) located primarily in West Texas. 

Falling oil prices and decreasing returns from the West Texas oil wells could squeeze the Systems aswell as other areas of state government that rely on expensive black gold. Some politicians are already having to cope with the reality that low oil prices mean underdelivering on the important tax-cutting promises that won them their seats. Incoming Lieutenant Governor Dan Patrick had been cheering on the campaign trail that school property tax cuts could be made a reality, but massive moves like that would require much more money this session to be feasible.

Like a fan’s relationship with Longhorn football, our relationship as students with low gas prices is complicated. Any benefit we get at the pump also has very real implications about how much we have to pay for school. Maybe the Board of Regents will decide in the future that tuition will go up again. In the meantime take advantage of the good prices and finally take that road trip to Marfa you’ve been putting off so long.  

Matula is a finance senior from Austin.