The Texan Petrostate

A piece by guest author Lonestar Republik

The term petrostate conjures images of black gold hidden under the sands, funding massive building projects, billionaires, sovereign wealth funds, corruption, and oil price-fixing.

All of that applies just as much to Texas as it does to Saudi Arabia or the UAE.

Texas was and remains the world’s first petrostate.

The Origins

While Texas has existed since 1845 as an American state (either in the USA or CSA), the petrostate of Texas burst forth after the 1901 Spindletop oil discovery. This led to such rapid growth of the oil industry that by the outbreak of World War II, Texas was by far the largest oil-producing state in the U.S., which itself was by far the largest oil-producing country in the world. The Texas Railroad Commission set the global oil price from the 1930s until the 1960s, before OPEC assumed this role. 

Intergenerational fortunes were made and lost as the gold rush ensued. From the East Texas oilfields, to the Permian Basin, to the offshore rigs, Texas has always been the center of the industry in the U.S. A political dynasty (i.e., the Bushes) was built on the back of the industry, and scandals erupted (e.g., Enron, Deepwater Horizon). This is the stuff of legends.

But just having oil does not make a petrostate. So what does? It varies depending on whom you ask, but my criteria are below:

1. Economic Dependence on Oil:

This is the necessary condition for a country to be considered a petrostate. In 2020 (pre-COVID), the Texas Oil & Gas Association estimated that the industry accounts for 30.5% of the Gross State Product, once the ripple effects of the industry have been taken into account. It’s safe to say that nearly a third of the economy is a large enough share to constitute “dependence.”

2. Sovereign Wealth Fund (SWF):

This criterion is less critical for a petrostate classification, but it is a common feature. To manage the oil revenues, governments will often set up sovereign wealth funds. Texas is no different.

The annexation treaty with the U.S. allowed Texas to keep its public land in state hands (other than the sections that are now parts of other states). The State of Texas gets oil and gas bonuses, rentals, and royalties on this land. Some 99% of that money has gone to two Sovereign Wealth Funds: the Permanent School Fund (PSF), which helps fund K-12 education, and the Permanent University Fund (PUF), which helps fund the University of Texas system and the Texas A&M system. (In 2023, the Texas legislature also created another fund, the Texas University Fund, which will support some other Texas universities.)

These aren’t small funds, either. The PSF has $61 billion in assets, and the PUF has $32 billion, as of August 2022. This is still smaller than the Gulf Arab SWFs — e.g., Qatar’s SWF has assets of $475 billion — but almost $100 billion in assets can still generate some serious returns.

During the 2022–23 school year, Texas A&M was the largest public university in the U.S., with an enrollment of 74,869 students. (Second-place UCF had over 6,000 fewer students.) Texas A&M’s sprawling campus and the large overhead required to accommodate that many students are funded in part by state oil money. This allows Texas to use its tax dollars in other ways, avoid an income tax, be fiscally sound, and still keep in-state tuition relatively reasonable.

3. Extravagant Wastes of Money & Eccentric Characters:

Lastly, what would be the fun of a petrostate without the interesting cast of characters who usually come along with it? And of course, sports ownership is a peak achievement for any Texan Oilman, Arab Sheik, or Russian Oligarch.

The Saudis own Liv Golf. Jerry Jones owns the Cowboys, the most valuable sports franchise in history. A grandson of H.L. Hunt owns FC Dallas. The Emir of Qatar owns PSG. Qatar built massive projects to host the World Cup. Houston built the Astrodome — the first indoor, air-conditioned, domed sports stadium, and also the first with artificial turf and the first with an animated scoreboard.

The Future

Since 2020, hundreds of companies, such as Tesla, HP, Oracle, and Caterpillar, have moved their headquarters to Texas, drawn in by the low tax rates and highly educated workforce. As mentioned, oil revenues subsidize both these draws. 

These new jobs diversify Texas’s economy away from purely oil. So now, Texas is a petrostate in recovery. Whether it’s due to government policies or just the inevitable running out of supply, one day the oil industry in Texas will wane. Time will tell if its efforts to diversify are enough.