The oil slump and its effect on Texas

Texas Railroad Commissioner David Porter recently quoted the president:

“We cannot drill our way to lower gas prices.” – Barack Obama, March 2010

Well, Mr. President, it appears we did – at least in part. Here’s a synopsis of how a barrel of oil sells for $100 in June and $50 six months later.

  1. American Ingenuity. Through rock fracturing and horizontal drilling,  U.S. oil companies figured out how to extract oil from previously unproductive lands. With barrel prices north of $75, it made economic sense to drill relatively expensive unconventional wells in rural U.S. locations and then transport the runs to market.
  1. Arab Stubbornness. Since oil flows like water in the Organization of Petroleum Exporting Countries (OPEC), they don’t need costly setups to increase production. They can turn it up or down at will. Historically, they have throttled back to keep oil prices relatively stable. Whether the Saudis are irritated that the United States failed to topple Syria’s rogue regime or simply perturbed that U.S. producers haven’t restrained their production, they have decided not to turn off the spigot this time. They seem content with $40, even $20, oil in exchange for a return to their historical market share.
  1. Laws of Economics. Supply is up due to the aforementioned reasons and the resumption of production in Algeria, Libya and Iraq. Meanwhile, global demand has moderated for several reasons. First, China overstated its growth and overstocked. Second, Europe’s economy remains sluggish. Third, stiffer machine efficiency requirements are reducing fuel needs.

 High supply and low demand has caused the price of oil to fall to a new equilibrium.

 A big question among U.S. producers and oil & gas states like Texas is: For what price does oil need to sell in order to maintain profitability? Most seem to think between $60 and $80.

A bigger question is: Was price stability sufficiently considered in recent years or was the focus more on whether wells would produce?

My hunch is companies considered capacity more than price. It was more “Will the ground produce?” and less “Will the market pay?”

Oil firms have begun laying off workers (e.g., Schlumberger recently announced it will cut 10% of its workforce). With Texas’ unemployment rate lower than the national average (5.1% vs. 5.8%), we have some room to absorb.

And Texas’ economy is more diverse today than thirty years ago, though only in terms of employment base. JP Morgan Chase economist Michael Feroli has noted that the industry’s share of state economic output is roughly the same as it was in 1985.

This is cause for alarm, as is the high level of leverage that oil companies used to put wells and pipelines in the ground. Banks now own billions in oil industry loans and trillions in derivative contracts (i.e., oil price hedges).

If prices don’t bounce back in the next 6 – 12 months, banks will sustain hefty losses in the form of loan defaults and underwater contracts. That will limit access to capital in other industries.

Finally, the oil field services companies that sprang up in the last decade will be collateral damage if prices don’t rebound soon. Hopefully, all these players have set aside bounty from the boom to buffer a bust.

Retired Southwest Airlines co-founder Herb Kelleher knows that’s not likely the case. He recently recalled a bumper sticker from the late 1980s: “Dear Lord, give me another boom and I promise I won’t screw it up.”

Follow Kevin Thompson at http://www.kwt.info.

1 Response to “The oil slump and its effect on Texas”


  1. 1 jessestroup February 2, 2015 at 16:25

    Two sensitive articles on our appetites.Thanks for writing them and publishing them. Always good to hear from you.  I would love to have seen you and your sons during the last 2 minutes of this super bowl.  It reminded me of the Iron Bowl we saw two years ago.Fondly yours,Jesse  Jesse R. Stroup Director of Spiritual Care Lifeline Chaplaincy 1926 Chattanooga Pl. #A Dallas, TX 75235 jessestrouplive@yahoo.com


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