The oil boom hasn't busted, but it's straining at the seams
Oil patch communities and states are starting to feel the impacts of sliding prices.
It was just last month that I asked, in this magazine, whether falling oil prices would kill the shale revolution. At the time, a “low” price for oil was $80 per barrel, which was more than 30 percent lower than the summer high. Surely, if it dropped below that, there’d be trouble in the patch. That seemed unlikely at the time: Many analysts predicted that it was only a matter of days before Saudi Arabia cut production, thus halting the price slide.
What happened, instead, is that the Saudis thumbed their noses at the world’s other oil producers and kept their wells pumping. Meanwhile, the International Energy Agency lowered its global demand forecast for 2015. As a result, prices kept plummeting, first to $70 per barrel, then $60. As I write this, Brent crude — the international benchmark for petroleum — is just below $60, and West Texas Intermediate, our domestic benchmark, is a few dollars below that. Oil prices haven’t been this low since 2009.
And, yes, there is now trouble in the oil patch. The shale oil revolution isn’t dead, by any means. But it’s sick. It’s still too early to tell how deep the sickness will go, since the effects of price swings can take months to manifest on the ground. But it’s been six months since the price slide began, and it’s clear that the oil industry is taking a hit. Here are a few of the signs of the bust:
Rig counts are down: The number of rigs actively drilling for oil and gas in the United States hit 1,931 in September, plateaued through November, and then dropped during the first weeks of December, to 1,893. Texas, which has the bulk of the nation’s rigs to start with, was the leading loser, with 24 rigs packing up and heading home. Western oil and gas states lost one to three rigs each. And while that could be chalked up to seasonal fluctuations rather than prices, those states have been seeing incremental losses since September. Drilling is the most labor- and capital-intensive stage of the production process, so when rig counts decrease, job losses ripple through oil patch economies. While most states still have more drill rigs operating now than they did a year ago, the recent decline is likely only the beginning: Earlier this month, Reuters reported that well permits plummeted from 7,700 in October, to just 4,500 in November, a pretty good indicator of where rig counts are headed. That's good news for the environment, of course -- the greens can thank the Saudis for that.
Jobs are getting cut, slowly but surely: Since the recession began in 2008, oil patch counties have been the brightest spot in the national employment picture. In parts of North Dakota, unemployment has crept close to zero; oil-producing counties in Wyoming, New Mexico, Utah and Colorado have had similar good fortune. Median wages have skyrocketed by as much as 150 percent over the last decade in some North Dakota counties. That light may be dimming, slightly. In North Dakota, there are considerably fewer job openings in the construction and extraction sector than there were a year ago. That’s not to say people are getting laid off — the state’s data aren’t current enough to determine that — but it does indicate that the oil industry is a little less desperate for workers. Over in Wyoming, meanwhile, the oil and gas sector shed about 200 of a total 18,000 jobs between September and October.
Oil state number crunchers are scrambling to rejigger budgets to account for major revenue dips: Whether or not the low prices actually cause a wholesale pullback on drilling, massive layoffs and a general collapse of the oil industry — a bust, that is — they have a huge impact on revenues for states and counties with a lot of oil production. That’s because, in most cases, oil and gas are taxed, and royalties assessed, based on the gross value of the product, not its volume. If oil prices drop 10 percent below the budget forecast, then, a state can expect 10 percent less revenue from oil. A few months ago, most states were counting on $90-$100 per barrel prices for 2015. Now they’ll be lucky to have a yearly average of $65. For a state like Alaska, which typically rakes in billions in oil severance taxes, that could result in serious budget deficits next year. In New Mexico, each dollar’s drop in the price of oil translates to about $7.5 million less in revenue, meaning they’re looking at losing hundreds of millions of dollars in potential revenue, even if the drill rigs keep cranking at current rates. That’s in a state where oil and gas taxes make up about one-third of the general fund. Wyoming and North Dakota face similar pain.
Domestic oil production is still going strong: Wait. What?! Yes, actual production continues to increase, or at least remain steady, which some might hold up as evidence that the price crash hasn’t hurt the industry. But that’s not how it works. Once a well is drilled, a company is unlikely to shut it down unless prices go really, really low, so it keeps producing. And even if prices plummet, a driller will go ahead with wells that it’s already drilling or in the final stages of planning. There are still almost 1,900 rigs out there churning away at the earth, and when those wells are completed, many of them will have a big initial production rate for a few months, during which overall production will probably continue to increase. As rig counts continue to drop, though, and as production from existing wells continues to decline (and it will), overall production is likely to drop off.
It would be foolish to try to predict what’s going to happen in the next year, or even few months, with oil prices. Most official forecasts anticipate prices staying fairly low for the next year or so. But forecasts are notoriously wrong. One group of folks seems to think that prices will stay low for the long-term: Buyers of ginormous gas-guzzlers. Low oil prices means lower gasoline prices, and that has apparently spurned a bit of a buying spree. If this sickness spreads, the outcome is fairly obvious. The gains we’ve made in fuel efficiency, and the decreases we’ve accomplished in fuel consumption, will be wiped out. Demand for oil will increase. Prices will go back up. And Craigslist will be flooded with ads trying to sell those ridiculous SUVs.
Jonathan Thompson is a senior editor at High Country News.
