How the West Texas Drilling Boom Could Go Bust. Again. By Terrence Henry Email

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Photo by Terrence Henry/StateImpact Texas

MIDLAND-ODESSA — It’s happened before, and it could well happen again. The current surge in drilling in West Texas is a product of advancing technique and technology, but it’s also a function of price and demand. So if the market will pay a certain price for oil or gas, it makes sense to drill. If it doesn’t? Well, that’s the side of the boom that people don’t like to talk about. Welcome to The Bust.

The last time a major bust hit Midland-Odessa was in the early eighties. Leading up to that time, high oil prices brought prosperity (including a Rolls Royce dealership) and development. High rises went up, and there was so much demand for housing that “newcomers to the city were living in tents, cars, and trailers,” according to the Texas State Historical Association. But when the price of oil dropped rapidly and supply greatly increased, drilling pretty much came to a stop in the Permian Basin. The Rolls Royce dealership closed. Three banks failed, causing depression-style runs on deposits. Offices became vacant, and new houses sat unsold.

Now, several decades later, things are booming again. Midland is now the second wealthiest city per capita in the country. Mercedes and BMW dealerships are open along Andrews Highway. A job at McDonald’s here starts at $14 an hour, with a signing bonus. Unemployment is at one of the lowest rates in the country. But there’s also a palpable fear the boom could bust again. All it would take is a drop in the price of oil. If that happens, Texas’ boom could be the victim of its own success.

People are here “to get their money and get out,” one oilfield worker in Odessa said, asking that his name not be used because of company policy. If a bust happens, he said, “this will all be tumbleweeds.”

“Living here is terrible,” the worker added. “Everything’s overpriced, the food is overpriced, living is overpriced.”

Photo by Mose Buchele/StateImpact Texas

Something else that could be overpriced? Oil. With drilling, there’s usually a “sweet spot” where price and demand make it profitable. “Tell me what the oil price is going to be and I’ll tell you how busy [drilling] is going to be,” said Kirk Edwards, President of Las Colinas Energy Partners, at a forum on the boom hosted by StateImpact Texas last month.

“Usually, at 80 bucks a barrel, these wells are still very economic,” he said. Oil has been over a hundred dollars a barrel for nearly the whole year thus far, so drilling — and all the business and royalty payments that go along with it — is profitable.

But just a few years ago oil was around 60 dollars a barrel, and that could happen again. “Surging supply from U.S. shale and similar technologically-driven unconventional oil sources is likely to create excess supply and put strong downward pressure on oil prices,” professors Mahmoud El-Gamal of Rice University and Amy Meyers Jaffe of UC Davis wrote in a research paper on oil prices this summer.

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Americans are driving less and using less gasoline. Our cars are getting more fuel efficient, and under new federal regulations, fuel efficiency is set to nearly double in new cars over the next fifteen years, to 54.5 miles per gallon by 2025. That doesn’t mean a bust is inevitable; but it does mean it’s possible. (For more on the economics that could lead to a drop in the price of oil, including why demand in growing nations like China and India may not be enough to offset it, check out the Houston Chronicle, which has an in-depth look at similar issues in the Eagle Ford shale this week.)

Busts are nothing new to Texas. They happened before the eighties in Midland/Odessa. A few shales over, in the Barnett natural gas field around Dallas-Fort Worth, they already are happening to a degree.

Natural gas prices have dropped nearly seventy percent since 2008. Now gas drilling has fallen in the Barnett region and other gas plays in the state. The number of new gas wells completed is down 65 percent since 2008, after more than doubling earlier that decade, according to data from the Railroad Commission of Texas, which oversees oil and gas drilling in the state. At the same time, the number of new oil wells has doubled in the last three years.

“People in Midland take in huge amounts of money, they lose huge amounts of money — then they move on to the next day,” Susan Orlean wrote in the New Yorker over a decade ago, in the leadup to the 2000 presidential election. “It’s a manic depressive city, spending lavishly and then desperately suffering.”

She went on:

“There’s a saying in Midland that whenever you strike oil you go out and get a boat, a plane, and a mistress, and when you lose your money you get rid of them one by one, starting with the mistress. No one mentioned anything to me about mistresses, but several people I met in Midland had been forced to sell their boats and planes. No one seemed ashamed about having lost money: it was like catching a cold–common and widespread and out of your control.”

Orlean also wrongly predicted at the time — as did most — that the Permian Basin would be out of oil soon, and “little exploration” was left. But then vast deposits of shale oil and gas were unlocked in the Basin and other parts of Texas through drilling techniques like hydraulic fracturing and horizontal drilling starting in the mid-2000s. And it’s worth noting that more are yet to come. “Every month, they find a new play,” said Paul Weatherby, the District Manager for the Middle Pecos Groundwater District, at the forum. “Now we’re looking at shallow plays where they’ve drilled across, and coming back, because they’ve found a way to find more oil and gas.”

Photo by Mose Buchele/StateImpact Texas

“The Permian Basin is so blessed,” said Hoxie Smith, director of Midland College’s Petroleum Professional Development Center, at the forum. “We have more oil here than anywhere in the world, probably more than Saudi Arabia, right here in this basin.” Tens of billions of barrels of oil could still be tapped, he said.

All of which begs the question: with all of that supply coming, if demand for oil drops, what’s to prevent the oil boom from busting once again? And when could that price drop come?

“I have no idea,” said Weatherby. “It’s a crystal ball to try and determine.”