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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

Around Texas

  • Houston’s Michael E. DeBakey VA Medical Center has received a $5 million grant from the U.S. Department of Veterans Affairs to establish a new brain injury center. The center will offer state-of-the-art testing facilities for returning members of the armed services.
  • In October, Lubbock-based United Supermarkets announced plans to build a 200,000-square-foot distribution center in Roanoke, a Denton County community.

Tough Times for Oil and Gas

Weathering the Storm - A Series of Reports on the Texas Economic Climate

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.

Nearly one in six Texans employed by the oil and gas industry has lost his or her job.

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.

Karr Ingham
Consulting Economist,
Texas Alliance of Energy Producers

“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.

Gary Vest
Director of Economic Development,
Odessa Chamber of Commerce

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.

What About “Cap and Trade”?

Cap and trade legislation, which would raise the price of conventional energy to encourage greater use of alternative sources, is still very much alive in Congress. Petroleum economist Karr Ingham is short and to the point on the topic.

“From the economic standpoint, it’s a terrible idea,” he says. “We’re not talking about an ‘unintended consequence’ – the stated goal of cap and trade is to raise energy prices to end users, to stimulate a movement to alternative forms of energy. I don’t put much stock in a program that artificially raises prices to consumers to get them to change their behavior.

“We have a marketplace that does that just fine,” says Ingham. “We’ve already seen it at work. Crude oil prices rising to $150 a barrel and natural gas rising to $10 to $15 per mcf, in a very short time, produced dramatic modifications in consumer behavior, in terms of the vehicles they were buying, and efforts to produce new forms of energy – just look at what’s happened over the last five years. It’s very remarkable, and it’s entirely due to the marketplace. I don’t think we need government to do this for us.”

Weathering
the Storm

Read the entire “Weathering the Storm” series:

…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

The Downhill Slide

From June 2008 to August 2009, the average price of oil fell by nearly 47 percent. The price of natural gas declined by 74 percent over the same period.

AVERAGE OIL PRICE (PER BARREL),
June 2008-August 2009

MonthPrice
Jun 2008
$134.02
Jul 2008
$133.48
Aug 2008
$116.69
Sep 2008
$103.76
Oct 2008
$76.72
Nov 2008
$57.44
Dec 2008
$42.04
Jan 2009
$41.92
Feb 2009
$39.28
Mar 2009
$48.06
Apr 2009
$49.95
May 2009
$59.21
Jun 2009
$69.70
Jul 2009
$64.29
Aug 2009
$71.14

AVERAGE NATURAL GAS PRICE (PER mcf),
June 2008-August 2009

MonthPrice
Jun 2008
$12.78
Jul 2008
$11.07
Aug 2008
$8.30
Sep 2008
$7.49
Oct 2008
$6.73
Nov 2008
$6.70
Dec 2008
$5.79
Jan 2009
$5.07
Feb 2009
$4.39
Mar 2009
$4.00
Apr 2009
$3.56
May 2009
$3.93
Jun 2009
$3.94
Jul 2009
$3.55
Aug 2009
$3.31

1 mcf = 1,000 cubic feet.
Source: Texas Comptroller of Public Accounts

What a Difference a Year Makes

Recent Texas statistics reflect the dramatic plunge in energy prices – and the resultant decline in the state’s production.

RIG COUNT, June 2008-August 2009

see alternative

VALUE OF OIL AND GAS PRODUCTION,
June 2008-July 2009

see alternative

Source: Texas Comptroller of Public Accounts

View table for rig count and value of oil and gas production.

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