As a lifelong Texan, I’ve witnessed this sort of pain several times. The late-1980s oil plunge saw people living under highway bridges in Houston while newly built office buildings sat empty for years. The suffering hasn’t been so bad this time, at least visibly, but we might still be in the early stages of the downturn. Much more pain could be coming.

That 1980s oil slide also helped create the savings and loan crisis. The oil boom drove up real estate values, and S&Ls made loans based on those values. Their entire industry fell apart soon after oil prices collapsed.

To make matters worse, politicians are particularly apt to spend their energy windfalls unwisely, as if they expect downturns will never happen. North Dakota is currently learning this lesson the hard way.

BISMARCK, N.D. – Gov. Jack Dalrymple on Monday ordered deep cuts to government agencies and a massive raid on state savings to make up for a more than $1 billion budget shortfall due to depressed crude prices and a drop in oil drilling.

North Dakota had more than $2 billion in various reserve accounts just one year ago, but oil prices – a key contributor to the state’s wealth – have taken a nosedive in the last year. The legislature’s record-high $14.4 billion budget for the two years that began July 1 was built on oil prices and economic assumptions that have fallen “much greater than anyone would have predicted,” the governor said.

“After 15 years of receiving almost entirely good news about the growth in revenues for North Dakota, it seems strange to hear that things have gone in the other direction,” Dalrymple, a Republican, told state agency officials at the state Capitol in Bismarck.

“It seems strange” that energy-driven tax revenue didn’t keep rising forever, says the governor. Strange to him, perhaps, but not to anyone who has been through energy booms and busts before, as we have in Texas.

If this cycle is anything like previous ones, the contraction is only beginning. It can and probably will get much worse. I am old enough to remember four distinct major busts and have read and heard the stories about oil busts going back to the early years of the last century.

Banks are already raising loss reserves against their energy loan portfolios. Investors are fleeing high-yield energy bonds. These are only the direct consequences. We’ll see a trickle-down effect if more companies lose their financing, lay off workers, and eventually shut down. The ex-owners and employees will then start liquidating their real estate and other assets, driving prices down.

What we don’t know yet is how widespread the impact will be. Past cycles were still net-positive for the US economy as a whole because everyone spent less money on fuel. GDP barely moved when oil crashed to $12 in 1986. We noticed in Texas, but folks in New York were fine.

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