Perched on the Gulf Coast, Texas and Louisiana have a resource-rich history, but one that has historically been marked by the swings of the energy market and natural disasters. The major resources—oil, natural gas, salt, and coal—have made this region a major production center and the largest refining and petrochemical complex in the world. Dating back to 1889, when oil in Texas spurted from the ground, energy and petrochemicals have been a staple in these two states' economies. The energy-intensive petrochemicals industry is one example of how these states seized their comparative advantage in natural resources. Yet, like other manufacturing industries, a slump in demand or increasing input prices can change the situation and impact a state’s economy adversely. Both Texas and Louisiana would benefit from diversifying the petrochemical-based products made in their states. In addition, Texas’s economy has performed better than Louisiana’s, in part because it has a more diverse manufacturing sector and is less reliant on the manufacturing sector as a whole.

The Petrochemicals Industry: Can the Gulf States Stay Afloat amid Fuel Costs and Competition Abroad?

Petrochemicals are the building blocks for a wide variety of everyday products ranging from a plastic bottle to construction equipment. The petrochemical industry uses oil or natural gas to create basic chemicals such as olefins—ethylene and propylene, among others—and aromatics such as benzene. The key difference from a fuel standpoint is that olefins can be produced using oil or natural gas liquids (NGLs), while aromatics must be derived from oil. Because the Gulf Coast is abundant in NGLs, a dependence on “cracking” a natural gas production method of petrochemicals predominated. This contrasts with Europe and Asia, which use mostly oil in their process.

Petrochemical companies in Texas and Louisiana, which relied on stable natural gas prices up until the late 1990s, were hit hard when prices started to climb as they began to lose their competitive edge on world markets. In addition to this erosion, they face increasing global competition from the Middle East, which enjoys cheap feedstock costs, and Asia. Both regions are aggressively building up capacity in order to supply the booming Chinese and Indian markets. As a result, the major U.S. petrochemical players are barely expanding their capacity for basic commodity products in North America. Rather, they are consolidating their domestic operations and re-directing their resources toward Asia and the Middle East via partnerships with local firms and technology licensing agreements. They are also concentrating their efforts on more value-added downstream products, such as engineering resins and specialty polymers, where they still have a competitive advantage.

How Do These States Compare in Their Economic Structure Since the 1990s?

Share of Chemical Manufacturing to Total Manufacturing in States Remains Fairly Constant

Chemical Ratio	1990-92	1993-95	1996-98	1999-2001	2002-04	Share Difference**
Louisiana	15.9	16	15.5	15.8	15.8	0.1
Texas	9.1	9	8.3	8.1	8.4	0.7

* The ratio of the moving average over three years of chemical manufacturing to the moving average over the same period of total manufacturing in the respective state
** Between 1990-92 and 2002-04

Louisiana is more reliant than Texas on chemical manufacturing; it comprises almost 16% of total manufacturing employment, whereas Texas employed a little less than 10% of total manufacturing employment at its high point during the period 1990-1992, and now only employs an average of 8.4% (between 2002-2004). Texas also has a more diversified manufacturing sector; its largest sector, semiconductors and electronics, made up 13% of total employment.

Manufacturing's Share of Total Employment Drops more in Texas

Mfg. Ratio*	1990-92	1993-95	1996-98	1999-2001	2002-04	Share Difference**
Louisiana	11	10.5	10	9.3	8.2	2.8
Texas	13.1	12.5	12.2	11.2	9.7	3.4

* The ratio of the moving average over three years of total manufacturing to the moving average in the same period of total employment in the respective state
** Between 1990-92 and 2002-04

Between 1990 and 2004, the share of manufacturing to total employment in both Texas and Louisiana declined, following the U.S. trend of moving from a goods-producing economy to a services-providing economy. After the trade, transportation, and utilities sector, manufacturing was the second-largest private sector during 1990-92 in both Texas and Louisiana. During 2002-04, however, it moved to fourth place in Texas and fifth place in Louisiana. But what sectors replaced manufacturing’s spot in these states? In Texas, education and health services and professional and business services ranked higher. But in Louisiana, leisure and hospitality also gained a greater share of employment than manufacturing. The quality of these new sectors differs. Comparing average annual wages over the same two periods, we see two interesting things: the manufacturing sector still pays the highest average wage in Louisiana (unchanged from 1990-92), while leisure and hospitality is one of the lowest-paying sectors. This contrasts with Texas, where manufacturing ranked third in average wages during 1990-92 and even dropped in importance (to fourth) during 2002-04. The private service sectors—information, wholesale trade, and financial services—pay more, on average, than the manufacturing sector in Texas. While both these states' manufacturing sectors are still an integral part of their economies, Texas has done a better job at bringing in other “riches”—other higher paying jobs—and relying less heavily on petrochemical production than Louisiana. As the saying goes, “Don’t put all of your eggs in one basket,” but also be careful where you put the eggs you take out of that basket.

Raul Dary

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