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For much of the twentieth century, Texas’ economy was driven by the oil and gas industry. At the height of the oil boom of the early 1980s, the industry accounted for more than a quarter of the gross state product and of state government revenues.

Though the state’s economy has diversified over the last 25 years, and the share of our economy accounted for by oil and gas has declined, the industry has seen a recent resurgence due to rising oil and gas prices. It remains a major component of the Texas economy and a significant contributor to the state’s fiscal coffers.

Diversifying our Energy Portfolio

Texas, like most of the world, still relies on fossil fuels to meet most of its energy needs. Over the last century, resources such as oil, gas and coal were relatively abundant and inexpensive. And all of these fossil fuels benefit from an energy infrastructure – refineries, pipelines, tank farms, electricity plants – developed over decades to make use of them.

But times – and our economies – are changing. Texas and the U.S. have become increasingly reliant on foreign imports to meet our petroleum needs. In 2006, 60 percent of the oil used in the U.S. came from foreign sources.1

Furthermore, burning fossil fuels can have an environmental impact. Our government established policies decades ago that have ameliorated some of the air and water quality problems associated with the use of fossil fuels. A growing environmental concern today, however, relates to unregulated “greenhouse gas” emissions. Congress is debating plans that would limit such emissions, especially of carbon dioxide. Indeed, major financiers in the U.S. are working now to set up markets to trade carbon emission permits in the event that new laws are enacted.

The possibility of such policies, combined with rising oil and gas prices, has prompted a resurgence of investment in alternative energy sources, as well as the development of new technologies to reduce the negative consequences of fossil fuels. Wind and solar power, biofuels and other renewable resources are increasingly important. And recently revised federal regulations, combined with rising energy prices, have helped to renew interest in nuclear power.


For decades, Texas has led the states in energy production and remains the nation’s largest producer and refiner of oil and gas. Texas has abundant reserves of lignite coal, which can be used to generate electricity, as well as uranium deposits that can be used as fuel in generating nuclear power. Finally, Texas has an abundance of many types of renewable fuels and leads the nation in installed wind energy capacity.

Texas, like most of the world, still relies on fossil fuels to meet most of its energy needs.

Texas energy production is still dominated by nonrenewable sources. Texas remains the nation’s largest producer of oil and gas (excluding federal offshore areas), accounting for 21.3 percent and 27.8 percent of total U.S. production in 2006, respectively.2 Texas has the largest share of the nation’s fossil fuel reserves, with nearly a quarter of all U.S. oil reserves and nearly 30 percent of the country’s natural gas. And the state is the national leader in refining capacity, with 23 refineries capable of refining 4.7 million barrels of oil per day, more than a quarter of all U.S. refining capacity.3

Nevertheless, Texas oil and gas production has matured. U.S. and Texas crude oil production both have declined steadily since their peak in the early 1970s, leaving the nation increasingly reliant on imports of oil (Exhibit 1). Texas’ natural gas production has remained relatively constant over the past two decades (Exhibit 2). Recent, dramatic increases in oil and gas prices have spurred exploration and drilling activity in Texas, particularly for natural gas. Natural gas production rose by 4.5 percent in 2006, yet crude oil production continues to decline.4

The nation’s use of renewable energy sources, however – including conventional hydroelectricity, wood waste, ethanol, geothermal, solar and wind – has grown steadily, from 5.52 quadrillion British thermal units (Btu) in 2001 to 6.79 quadrillion Btu (or “quads”) in 2006.5 (The Btu is a measure of a fuel’s heat content, useful for making comparisons among fuels.)

Much of Texas’ energy consumption is attributable to industries that make products used across the U.S. and around the world.

Texas leads the nation in renewable energy potential with a large amount of wind generation capacity and a high level of solar radiation capable of supporting large-scale solar power generation.6 Though Texas gets only about 3 percent of its electricity from wind power, it now has the most wind generation capacity in the country, at 27 percent of the national total.7 Texas’ current wind energy production alone is enough to power about 1 million homes in the state.8 The intermittent nature of wind energy, however, means that it cannot be relied upon as a primary source of electricity and must be supplemented by more reliable sources, such as coal, natural gas or nuclear power plants.

Texas also is the nation’s largest producer of biodiesel transportation fuel, capable of making more than 100 million gallons of transportation fuel each year, with another 87 million gallons of capacity under construction. In 2007, Texas made about 73 million gallons of biodiesel.9


Texas’ energy use is tied to its large population, hot climate and extensive industrial sector. Compared to the U.S., Texas has a high concentration of energy-intensive industries, such as aluminum and glass manufacturing, the forest products industry, petroleum refining and petrochemical production.10 In other words, much of Texas’ energy consumption is attributable to industries that make products used across the U.S. and around the world.

Texas thus leads the nation in total energy consumption, accounting for nearly 11.5 percent of all U.S. energy use. Texas leads the states in its use of oil, natural gas, coal and electricity, consuming over 11.5 quads of energy in 2005 (the most recent data available). California was second with more than 8 quads.11

Analyses of energy consumption commonly consider four end-use sectors – residential, commercial, industrial and transportation. The industrial sector consumes the majority of energy in Texas (50 percent). For the U.S. as a whole, by contrast, the industrial sector consumes just 32 percent (Exhibit 3).

Decreasing energy intensity is an indication of greater energy efficiency and structural changes in the economy.

Exhibit 4 examines Texas’ energy consumption by sector since 1960. Total energy consumption has risen by an average of 2.2 percent annually since 1960. Residential and commercial consumption both increased gradually, while the demand for transportation fuel rose more rapidly, a trend reflecting a growing population and expanding economy. Industrial consumption is much more variable than the other sectors, as it is more sensitive to higher energy prices and economic slowdowns. Industrial consumption fell by 13.3 percent from 2003 to 2005, due to higher energy prices and greater investments in efficiency, paralleling efficiency gains prompted by higher energy prices in the early 1980s.

Energy use per person in Texas also has decreased in recent years to its lowest level since 1965. Texas total per capita consumption exceeds the U.S. average, mostly due to Texas’ large industrial sector (Exhibit 5). Combined residential and commercial per capita consumption in Texas (excluding industrial and transportation use) was slightly lower than the U.S. average in 2005. In addition, per capita industrial usage in Texas has dropped steadily in recent years to its lowest level since 1960, the first year for which data are available. Per capita transportation use also has declined in recent years.

Furthermore, the overall energy “intensity” of the Texas economy – or its energy use per dollar of gross state product (GSP) – fell by nearly 68 percent between 1970 and 2005 (Exhibit 6).12 Decreasing energy intensity is an indication of greater energy efficiency and structural changes in the economy, such as growth in less energy-intensive service industries. Pricing also has an effect, as energy intensity declines more during periods of high energy prices. While Texas and the U.S. are increasingly reliant on imported fuel, our economy is less dependent on energy in general, as Exhibit 6 demonstrates.13


Given Texas’ large population and many energy-intensive industries, it is no surprise that Texas businesses and consumers spend more money on energy than those in any other state. And with the cost of energy on the rise, total spending on energy has increased in recent years. Adjusted for inflation, Texas’ energy expenditures in 2005 were at an all-time high. In 2005, Texans spent $114 billion on energy, accounting for nearly 11 percent of all U.S. energy expenditures. This measure nearly doubled the inflation-adjusted $61 billion spent in 1998, a period of much lower energy prices.14

While Texas and the U.S. are increasingly reliant on imported fuel, our economy is less dependent on energy in general.

Per capita energy expenditures in Texas rose by 51 percent between 2002 and 2005, tracking the increase in energy prices. This rise roughly paralleled that for the U.S. as a whole, but Texas per capita energy expenditures were 42 percent higher than the national average in 2005 (Exhibit 7).

The share of GSP devoted to Texas’ energy expenditures, however, declined steadily for most of the past 20 years, despite recent increases. In 2005, Texas’ expenditures represented 11.6 percent of GSP, down from a peak of 17.5 percent in 1981. The U.S. expenditure share was 8.4 percent in 2005 (Exhibit 8).

Though complete data are not yet available, it is clear that energy spending has continued to increase since 2005. Oil prices have set new records, easily surpassing $110 a barrel. Prices for other fuels have been rising as well. It is likely that energy spending per capita and as a share of GSP have continued their recent climbs.

Economic Impact

In 2006, the Texas energy industry employed nearly 375,000 people who earned more than $35 billion in total wages. Energy-related industries include oil and gas extraction, coal and nuclear mining, utilities, petroleum refineries, petrochemical manufacturing and other energy-related manufacturing.

In 2006, the Texas energy industry employed nearly 375,000 people who earned more than $35 billion in total wages.

Not surprisingly, the oil and gas industry accounts for the largest share by far of this economic activity. In 2006, the oil and gas industry contributed 14.9 percent of Texas’ GSP, compared to its lowest point of 7.4 percent in 1999. The oil and gas industry employed more than 312,000 Texans, or 3.1 percent of the state’s nonfarm jobs. These recent gains are due in large part to rising oil and gas prices.

Texas has abundant deposits of lignite coal and some bituminous coal deposits. Coal production contributed 2,241 mining jobs and $168 million in wages in Texas in 2006.15

The state’s two nuclear reactors – Luminant’s Comanche Peak near Glen Rose and the South Texas Project (STP) in Matagorda County – employ a combined 2,150 persons, not including contractors. Total payroll for the two plants is about $196 million annually.16

The renewable energy sector is modest in size but is growing rapidly. Aggregate state employment and economic data currently are unavailable for this portion of the energy industry. It is, however, expanding in Texas, particularly in wind energy generation and biofuels production.

Environmental Impact

Energy production and consumption affect our environment in ways including air and water quality, land use and climate change. Government action to limit the negative effects of energy use can affect its cost by making various fuels more expensive.

In March 2008, the Environmental Protection Agency tightened federal restrictions on pollutants that contribute ozone, a primary component of smog which can cause respiratory and other ailments. Failure to comply with federal air quality regulations could lead to sanctions, including the loss of federal highway dollars.17

Much of the current debate concerning energy and the environment focuses on greenhouse gas emissions, which most climate scientists believe contribute to global climate change. A bill recently introduced in the U.S. Senate would establish caps on greenhouse gas emissions. If federal law requires limits on emissions of greenhouse gases such as carbon dioxide, it will inevitably shape the decisions made by Texas businesses, investors and policymakers as they develop the state’s energy infrastructure. And since Texas is the nation’s leading energy consumer, any caps on carbon emissions could have a significant economic impact on the state.

Efficiency and Conservation

The following pages discuss various fuels that might help to meet Texas’ growing energy needs in the coming decades. Efficiency also has a potential role in meeting those needs by reducing energy use and offsetting the need to build new generating or production capacity. In general, investments in increased energy efficiency produce subtle and diffuse benefits, spread out among millions of consumers. Nonetheless, those results are quantifiable and justify the consideration of greater efficiency in energy policy development.

In light of a rapidly growing demand for power, higher energy prices and increased awareness of environmental and energy availability concerns, the concept of doing more with less offers an approach that many say is both feasible and affordable. Many government agencies, nonprofit organizations, utilities and their regulators, manufacturers, lawmakers and consumers across the country and internationally are undertaking energy efficiency measures and research.

In fact, efficiency gains have already made a strong impact on Texas’ energy use. As previously noted, per capita energy use in Texas has declined in recent years as prices have climbed (see, for example, Exhibits 4 and 5). Furthermore, our energy “intensity,” a measure of the amount of energy required to produce each dollar of economic output, has been in steady decline for more than thirty years (Exhibit 6). These are indications that Texas has already benefited substantially from efficiency improvements, a trend that is likely to continue.

Efficiency improvements can affect every type of energy use, although they vary widely in complexity and energy savings. Considerations such as costs and benefits, length of the “payback” period for investments and technological questions must be weighed carefully, but energy efficiency can provide Texas with the opportunity to reduce future energy demand.

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