Starting with the idea that the burgeoning Permian Basin is expanding its horizons, we kick off this series that will carry on for two more issues. The given here is success—there’s no questioning the Permian Basin’s success. Our subject is its staying power and depth—how dependably and deeply does it sustain the region? How is life changing for those who are along for the ride?
[Editor’s Note: In this first installment, we examine the implications of growth. Our sources are an insightful director of economic development and two highly respected economists—all of them with a finger on the pulse of the Permian.]
“It’s an astounding turn of events.”
The speaker was Karr Ingham, Amarillo-based professional petroleum economist and founder of Ingham Economic Reporting. Ingham was telling PBOG magazine how the growth in the Permian Basin’s oil output signifies a big increase in its market share of the U.S. domestic market.
That increase was fueled by technology, of course, but the boom in technology was fueled by a rise in the global price for crude oil. And there were yet other factors at work. But Ingham’s point was that market forces were behind that “astounding turn.”
It’s been a turn of events that has been many years unfolding, as Ingham indicated.
The idea that we are riding a boom-and-bust cycle as in past decades is an idea that needs re-examining. Booms do occur, and busts as well, but what the Permian Basin is enjoying is a sustained strong economy that has its roots in global economics, and those global economics are favorable for the Permian because they are connected with massive industrialization movements in extremely large economies in Asia and elsewhere.
“There are those who think that this [strong market] in the Midland-Odessa oil and gas business is just the 1980s revisited—that there is going to be this flurry of activity and then it is going to flame out and the region can go to pieces and stay that way a long time,” Ingham said. They might think that, he said, “but it doesn’t seem at all like that to me. Because of the change in the global market scenario.”
Not that long ago—about a dozen years ago—the industry was suffering through one of those dips that came along with some regularity. Prices for crude oil were steadily in the $20 to $25 range, Ingham said. “If they hit $30, we thought they were ‘too high,’” he added with a laugh. “Well, there is a reason why we went from that scenario to $100 oil in [just a few years]. And the reason was a set of global market circumstances that have changed. The value of energy to the country and the world is now reflected in the price of that product, and it blame well oughta be. Today, nobody has a strong sense that we are going back to $20 or $30 oil… and if we do, certainly not for any length of time.”
Dr. M. Ray Perryman, a leading economist and founder of the Waco-based Perryman Group, an economic and financial analysis firm, shared with PBOG his feeling why the current Permian Basin boom will last. “During the 1980s, the surge in activity was driven by a combination of political events and supply shocks,” Perryman said. “This time, however, demand is strong due to ongoing economic recovery and increasing consumption in developing economies. While the energy industry is cyclical by nature, the current boom is far more sustainable than those of the past. Limits to potential activity could stem from water supply issues and workforce shortages.”
Asked if there is some way of quantifying the impact that the Permian Basin’s upsurge—and that of the U.S. shale revolution in general—is exerting on the broader U.S. economy, Perryman suggested that the buffer it has given the United States against foreign tumults has been significant. “The increase in domestic production is helping insulate the United States from the current unrest in the Middle East,” he said. “While we are still importing crude oil, rising production in the Permian Basin and other unconventional plays is helping to keep prices from spiraling even higher. The industry itself is clearly a huge source of economic stimulus, but the pricing effects are also very beneficial.”
Expanding Indicators
In the Midland-Odessa area, which is the nerve center of the Permian Basin, the boom has gone beyond a mere increase in oil and gas activity, extending out into communities as the money trickles into non-oil-related commercial development, including retail, manufacturing, lodging, residential, and other industries.
Guy Andrews, who is the executive director of Economic Development for the Odessa Chamber of Commerce, has a grasp of this phenomenon that is as good, if not better, than anyone’s. And Andrews says that the growth and changes are only accelerating.
“I think we are still in the early stages of it,” Andrews said. “My phone is continuing to ring off the wall and emails continue to come in every day. We are just running out of land, there are so many businesses that want to relocate here. And the ones that are coming in are really big companies that have decided that this is where they are going to invest their dollars. Like Trican Services Company, which is the world’s largest oilfield services company. A Canadian company. They are here already. Baker Hughes and Halliburton are undergoing major expansions. They are each spending about $35 million expanding their facilities on west I-20. Sanjel is another company that is coming in from Canada and they also have a completions company, called Suretech. Then the Union Pacific Distribution Services company just opened up a rail port that has four rails in it, and after the first of the year they are going to expand that to 16 rails. That is a sure-fire indicator… they are not going to do any expansion if they don’t already have the customers lined up. They don’t speculate. We just sold 65 acres to a company that has been bought by Schlumberger, and that is going to begin construction. Meanwhile, Standard Sales—they’re the Budweiser distributor—just broke ground on their construction. They’re doing a $20 million, 150,000-square-foot refrigerated distribution center in our business park. And Cudd Energy Services just completed their construction and moved into their new facility in our south industrial park.”
Such is the level of activity that a conversation with Andrews’ office generally elicits a string of announcements like these. There’s more, still. The magnitudes of the developments, and the dollar figures, are staggering.
It’s as if a stage two, and stage three, have kicked in.
Said Andrews: “After all the commercial comes in, which has just been absolutely amazing, then they begin to build the houses. The two big [housing] companies in here are Beten Bough Homes out of Lubbock and then D.R. Horton. Those are the two kind of mass, national-type builders that are in here, but lots of local building is going on. We will be opening up shortly four new apartment complexes this year that are going to add over a thousand new units. And then there are at least three or four more planned. Then the retail of course follows the rooftops. And we’re beginning to see that. We’ve got a Chipotle that’s just been constructed. Should open shortly. We’ve got Dickie’s Pit Barbecue. I just heard we are probably going to get a Saltgrass Steak House.”
Andrews said he does not deal with the Midland side of things, but that he knew they are experiencing phenomenal growth, as is the town of Andrews, north of Odessa.
“Andrews is the number one micropolitan community in the nation,” he said. “Domino’s Pizza just announced that the number one store in the world for their chain is in Andrews. Amazing thing.”
A company called Air Products, which produces nitrogen, plans to build a $28 million facility in Odessa’s south industrial park. Andrews said the city still holds out hope that in 2014 they’ll attract the Texas Clean Energy Project, which is a $3 billion project. A company called REXtac will fund a $680 million expansion to produce adhesives used in diapers. Union Pacific has expressed plans to do some additional rail work, besides the rail work already discussed above. “There is so much rail traffic here,” Andrews said. “I think we get about 59 trains a day.”
There’s more—much more than has been cited here. What it all amounts to is a big change for the region—and a change in the nature of the region.
“The census bureau is estimating our population at 140,200 in Odessa,” Andrews said. “In the 2010 census it was at just under 100,000—at 99,940. And Midland is experiencing the same thing. Their population was about 111,000 and they’re up there, too. Some have said that we’re expected to double our populations by 2020. I don’t know if that is going to happen, because of infrastructure and land requirements, but the people are going to continue to pour in.”
And change the lifestyle.
“It really does,” Andrews said, “because there are a lot of the local people who like having the kind of the small town feel. That’s gone, because of the traffic. To get into a restaurant, you may have to wait up to an hour or so. It’s just because of lack of employees. Sometimes restaurants shut down sections because they don’t have employees, but those are things that will be cured over time as more apartments and housing open up.”
Is there enough oil and gas business lined up to sustain this growth? Can the city still be bullish about long term prospects?
“Absolutely,” Andrews said. “There will be people who will say there’s got to be a bust coming. Generally those are people who have lived through that. But when you talk to companies, it’s a different story. The president of Halliburton for the northern hemisphere was here for the opening of their building, and he said that of all the places in the world they could invest, they were betting on the Permian Basin. Because we’ve got stacked plays. The technology’s here. We’ve been at this for 92 years. We had, I think, $18 billion dollars in investment that flowed in here this past year, and I think it’s going to increase a couple of billion. Every year we expand that.”
Is there any reason, besides the oil and gas production, that accounts for this local economic strength? Are the people of the Permian Basin due any credit?
“Yes, I think a lot of it has to do with our attitude out here about drilling in general,” he said. “We still have wildcatters out here. We still have entrepreneurial people. And we probably have added now, since 2010, about 3,000 businesses to Odessa. It’s an oil friendly community. We don’t have this stuff about ‘anti-frac’ing’ and all of that other stuff that goes on. But I think West Texas in general and the Permian Basin just have an entrepreneurial spirit. Hard working people. Well, with a 3.6 percent unemployment rate in Odessa and a 3.1 in Midland, that tells you that people are willing to work. They say if you get to 5, that’s full employment, so I’d say we’re at a negative 1.4. [laughs] I tell people that anyone who wants to work and is able to work can find a job here, and not just in the services industry. Our [effective] minimum wage is approaching about $15 an hour. Not everyone is making that, but that is kind of the going rate.”
More Clout
As Karr Ingham has emphasized, the Permian Basin is tied ever more tightly to global economic conditions and global pricing structures, and those global macros bode favorably for the short and even the foreseeable longer term.
Local influence is diminished. “The largest company operating in the Permian Basin has absolutely no effect over the price that it can receive for crude oil,” Ingham said. “That’s something that’s set at a much higher level. So the normal market circumstances that have taken prices to where they are—those are going to continue to drive the price range. And that is a scenario I am comfortable with. So all of that, of course, has brought about this set of miraculous occurrences. Occurrences that are miraculous to me, anyway. I don’t know about anybody else. They ought to be miraculous to everybody else.
“Right now we are producing more crude oil in Texas—and I haven’t looked at the Texas Permian numbers in a bit—but right now we are producing more crude oil in Texas than in any year since 1988, and maybe earlier than that. And the numbers just continue to go up, which means we are going to eclipse those past years of the ’80s. Moreover, in Texas, we have historically produced about 20 percent, one fifth, of the nation’s crude oil.
“As we sit here right now, and this number has just changed over the last three or four years, but this number has gone from about 20 percent up to between 30 and 35 percent.”
What Ingham was describing is an increase, on a factor of about 50 percent, of the Permian Basin’s share of the domestic market. To go from 20 percent to more than 30 percent is, of course, an increase of half-again as much.
“That is an astounding turn of events,” Ingham said, referring to the whole economic rebound that has occurred.
“So, there is crude oil production going on in other parts of the country, in the Bakken and in other parts. Crude oil is on the rise nationally as well. But it is on the rise faster in Texas. Which means that we are, by that amount, more important to the nation’s energy scenario than we were four years ago. Between the Permian and the Eagle Ford—and the Permian is still the big dog on the block—but between those two production regions, that is where of course the lion’s share of this is coming from.”
Ray Perryman likely would concur. Perryman, asked if there have been any unexpected sidelights to this recent revitalization, had this to say:
“Because the Permian Basin has been down this road before, the oil boom we are seeing now is causing less chaos than it would have otherwise. As the unemployment rate has been driven down to the point where many types of businesses [such as fast-food operations] are having problems finding workers, significant signing bonuses and rising pay have contributed to improvement in the financial situation for many residents of the area.”
All of which adds up to a healthy set of future prospects. Can we be confident that it’ll hold to this growth track?
Said Perryman: “Technological advances will continue to increase the economic benefits possible through developing new fields and reworking existing plays. Without a doubt, the level of exploration activity will fluctuate with changing economic conditions and the political situation in the Middle East. Even so, this boom is notably different from the past, and indications are that it has some definite staying power.”
Next month: We continue this exploration with input from oil companies themselves, along with industry observers and analysts.