MAR
6

Opportunities, and Risks, in Oil Patch Boomtowns

 
Eighty miles northwest of Laredo, Texas, in the heart of the Eagle Ford shale formation, rests the tiny town of Carrizo Springs. This town of 5,800 was, for years, a quiet ranching and farming community. The shale boom has changed all of that. A rush of oil and gas investors, motivated by new ventures, inundated the area with high-paying jobs. The new residents of Carrizo Springs brought with them all the hallmarks of economic activity in the region: drill rigs, trucks transporting crude, and new building construction. Outlets for goods and services, restaurants, shops, and hotels followed to accommodate the flurry. In December, Carrizo Spring’s unemployment rate was 2.8 percent—half the national average—and the population doubled in six years. Things have slowed down considerably in 2015. “We are stacking rigs and laying people off every day. Everyone is,” a Chesapeake manager in Carrizo Springs told the Financial Times. During the height of the shale boom, oilfield workers would clock 60 or 70 hours per week. Now, companies have pared back working hours, and last December, oilfield service giants announced major cutbacks in the size of their workforces. Halliburton said it would trim 1,000 workers, Baker Hughes said it would lay off 7,000, and Schlumberger cut another 9,000. Residents of the oil patch were caught off guard. “What the hell just happened?” asked TJ Jones, owner of the Energy Lodge. “For two-and-a-half years my waiting list was so amazingly long that I didn’t even think about it. Now here I am hustling.” Layoffs in the fields led to a decline in local support industries, and the boomtowns are growing quiet once again. The signs of an economy put on hold are ubiquitous. "It's bad here," said Rachel Galindo, co-owner of G and G Roustabout in Midland, Texas. "If [oil prices] stay low, I don't know how we'll make it," she told The Los Angeles Times. Boomtowns like Carrizo Springs have driven U.S. oil production to its highest levels since the 1970s, reaching 9.2 million barrels per day (mbd) in January 2015. However, lower than expected demand growth, as well as OPEC’s November decision to sustain supply levels caused many higher-cost oil producers to scale back expensive ventures. This had an immediate impact on production growth in Texas, the nation’s largest producer at 3 mbd last month. Nationwide, new well completions have slowed. In the Eagle Ford and Permian basins, the two largest shale plays in Texas, over 300 oil rigs have been idled since oil prices began to drop. The Lone Star State has been through this before. Between 1985 and 1986, crude oil prices collapsed more than 67 percent on market surplus. Today, West Texas Intermediate crude has fallen by more than half its mid-summer value. Inflation-adjusted December gasoline prices were roughly the same in 1985 as they were in 2014, according to The Wall Street Journal, at $2.55 and $2.54, respectively. But there are important differences between then and now. Oil drilled from shale rock formations accounts for nearly half (49 percent) of U.S. oil production. The U.S. economy also imports more than twice as much oil as it did then, although vehicle efficiency has improved. In his seminal book, The Prize, Daniel Yergin points out that the market oversupply of the 1980s caused the American oil industry to essentially evaporate as Saudi Arabia wrestled back market share. Not so much today, as innovative and efficient drilling technologies have helped blunt the impact of lower oil prices on U.S. producers. Texas learned from its experience in the 1980s, and diversified its economy to prevent similarly drastic spillover effects. One in six homes were vacant in the state at the start of 1987. County tax revenues plummeted by $8 billion, The Wall Street Journal reports. Seven hundred Texas banks failed. At the time, the state jobless rate skyrocketed as the economy exposed itself to the volatility of an oil price fall. Last month, due to a host of economic factors, the unemployment rate remained 1.6 percent below the national rate, at 6.6 percent. Banks with high exposure to commercial-mortgage backed securities (CMBS) may nevertheless feel the pinch of low oil prices. Yesterday, Bloomberg reported that many Wall Street analysts are concerned about distressed CMBS in the wake of the oil price decline in shale oil boomtowns. Whole apartment complexes are often run like extended stay hotels that simply do not require longer-term leases. Demand for housing in these places is frequently fluid, and can leave investors exposed to bad debts. “Demand is going to go from very high to zero overnight, and that’s a problem,” said Lea Overby, an analyst with Nomura Holdings. The Osaka, Japan-based company has invested $16 billion in such property holdings. In North Dakota—where unemployment dropped to 2.8 percent last month, the lowest in the nation—the housing market is adjusting slowly to this economic reality. According to Reuters, while the industry still has jobs needing to be filled, rents have dropped a bit in the face of the oil price slowdown. The global news agency reports that in Dickinson, North Dakota, the price of a two-bedroom apartment was cut last week to $1,775 from $2,159. Due to an initial dearth of available, affordable housing, oilfield workers slept in cars when the boom first arrived in 2009. The underlying economic conditions in places like Dickinson and Carrizo Springs are roughly the same. An economic boom followed the discovery and development of an important natural resource. The question is how much these boom-and-bust cycles will affect the local economies in these places. Since the 1980s, energy-rich Texas has become more insulated from the effects of oil price declines through diversification. But even there, some economists worry that the oil price slide will trigger further job losses in non-petroleum sectors. One model, prepared by economists at the Federal Reserve Bank of Dallas, forecasts that a drop of about 50 percent in oil prices translates into a 1.2 percent drop in Texas employment. If it proves correct, Texas stands to lose about 140,000 jobs, NPR reports. Even as the U.S. economy gained 295,000 jobs in February, the oil sector lost 1,100 nationwide. The price of oil not only affects boomtowns in the oil patch, but state and regional economies. The effects of oil price declines on demand for real estate, jobs, and the stability of local and state government revenues underscore the interconnectedness of these important indicators with a single global commodity: oil. The fact is that when oil prices fall, they affect real people in communities that depend on the resource to earn a living. "If I could tell everybody that we'd have $70 oil in 2016, we could breathe easier," Gene Veeder, director of the McKenzie County Job Development Authority, told The New York Times. With price projections unable to agree on any sort of upward trend, only time will tell.