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November 2009

SEPTEMBER REVENUE (in millions): SALES TAX: $1,476.2 OIL PRODUCTION: $83.3 NATURAL GAS: $8.6 MOTOR FUELS: $257.4 MOTOR VEHICLE SALES: $237.8 TOBACCO: $63.7

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INSIDE

• Fiscal Notes Home
• Tough Times
  for Oil and Gas
• Texas oil producers affected profoundly by gas prices
• A Letter from the Comptroller
• New Funding for Child Care
• Stimulus funds to aid parents searching for work
• Big Bucks for
  Big Bucks
• Hunters take aim at Texas game.
• Bring the Rain… Please
• Is Texas’ drought ending?
• Property of
  (Your Name Here)
• Unclaimed property reunites Texans with lost treasures.
• Brief Bytes
• News shaping the
  Texas economy
• Texas by the Numbers
• State revenues, expenditures and
  cash condition
• Relocating?
  Try Texas
• Texas cities rank high as best places to move.

Tough Times for Oil and Gas

by Bruce Wright

One of the oldest rules of the energy industry is that it’s subject to “cycles.” Which may not be a lot of comfort when you’re at the bottom of one. Like it or not, though, Texas energy producers – and the businesses that serve them – are profoundly affected by changes in the price of oil and gas.

A little more than a year ago, the energy industry had just seen the last of the most dramatic price increases in U.S. history. Texas production activity soared, nearly tripling the number of oil and gas rigs operating in the state between 2002 and 2008. It was the boom to end all booms – until it, well, ended.

Between December 2008 and August 2009, Texas lost at least 37,500 jobs in the energy industry, according to Karr Ingham, consulting economist to the Texas Alliance of Energy Producers. That means that nearly one in six Texans employed by the industry has lost his or her job this year.

And the communities that depend on energy? They’re hurting, but coping – and waiting for the inevitable return of higher prices.

Feeling for the Bottom

Ingham says this is the industry’s third major downturn since the late 1990s. The first lasted about 20 months, from fall 1997 until summer 1999. A second, less severe downturn lasted about a year, from August 2001 to August 2002.

“Where we are now, though, is kind of uncharted territory, because prices increased so rapidly and to such a lofty and unprecedented level, both for crude oil and natural gas,” Ingham says. Energy prices began sliding in July 2008, but the industry didn’t start slowing down until October.

“We’ve been watching the dominoes fall ever since,” says Ingham. “And at least compared to past experience, we’re still fairly early on into this thing. I don’t think we’re at the bottom yet.”

In the past few months, oil prices have begun rising again, but it’s had less effect on Texas’ energy employment than you might expect.

“Crude oil prices got down to the $30 to $40 range, and it’s essentially doubled since then, but it hasn’t done a whole lot for us,” Ingham says. And that’s because, “in terms of exploration and production activity, which is the real job creator in Texas – drilling rigs, service crews and so forth – we’re much more driven by natural gas than crude oil.”

And natural gas prices are still in the doldrums. August wholesale prices for natural gas averaged $3.31 per thousand cubic feet (mcf), versus $12.78 per mcf as recently as June 2008.

In the “Energy Epicenter”…

Perhaps no part of Texas is as thoroughly identified with oil and gas production as West Texas’ Permian Basin. “We’re the energy epicenter out here,” says Gary Vest, director of Economic Development for the Odessa Chamber of Commerce, who estimates that four-fifths of the city’s economy depends on the industry. And the collapse in energy prices has definitely left a mark.

“We were hurting for employees [during the boom],” Vest says. “Now we’ve got 9 percent unemployment.” But some production companies are back in the field.

“The drillers who weren’t heavily mortgaged, those guys are pretty much back to work,” says Vest. “The ones that depend on loan capital are not, because the capital’s just not there for drilling.”

Production is only one facet of the Odessa area’s economy. Many metal fabrication companies build drilling rigs and other equipment used in oil and gas production. “Those will be the last industries to come back, and that has really hurt us,” Vest says.

…and the Barnett Shale

The north-central Texas counties that overlay the Barnett Shale, one of North America’s richest natural gas deposits, were among those most affected by the energy boom.

The price spikes transformed the area’s economy, attracting millions of dollars in new investment and creating thousands of jobs. But plunging natural gas prices have sharply curtailed this activity, not least because production in the Barnett Shale is difficult and costly.

“Those are deep wells or horizontal wells, and they’re terribly expensive projects,” says Ingham. Three-dollar natural gas simply isn’t going to make production worthwhile.

Much of the Barnett Shale boom played out in the Fort Worth metropolitan area, but smaller communities benefited as well – and are feeling the bust more strongly.

“We had about 225 energy service companies set up operations in Johnson County,” says Jerry Cash, director of economic development for the city of Cleburne. And area manufacturers benefited as well.

“We have some metal fabrication shops that make things like new gates, fencing and cattle guards for drilling sites,” he says. “Our sales tax revenue for 2008 was up 100 percent over where it had been about six years ago. By March 2008, we were down to 3.3 percent unemployment.

“Now, with the decline in energy prices and the cutbacks at energy companies, unemployment is back up to 9.4 percent,” he says. “So we’ve seen some pretty wide swings.” As of September, Cleburne’s local sales tax collections were down nearly 13 percent versus the same period in the preceding year.

Riding the Cycle

Short-term miseries aggravated by the broader national recession can obscure a simple fact: virtually no one expects energy prices to remain low. But we may have to wait for a recovery to see the cycle swing upward once more.

Natural gas prices in particular are sensitive to the recession.

“We think of gas in terms either of household uses or as an electric generation fuel, but its primary use really is in heavy industry,” says Ingham – especially in the petrochemical complex along the Gulf Coast. “And during a recession, that activity suffers, and so does demand. We’re going to have to work through it before prices rise again. In the meantime, we’ve got a glut of natural gas, there’s no doubt about it.”

Ingham cites speculation that the recovery is already beginning. Due to the difficulties involved in gauging the movements of the national economy, however, “we won’t know that until next year, even if it is the case,” he says. “But if so, we should wait at least six months after that before we expect to see signs of a turnaround in energy demand, and in Texas exploration and production.

“It looks to me like, at minimum, it’s going to be the second quarter of 2010 [before oil and gas activity picks up again],” Ingham says. “But we will cycle through it. The long-term outlook for energy products is extraordinarily bullish.” FN