Odessa and Midland deal with volatility together and apart.
Chase Beakley
It was the best of times, it was the worst of times.
You knew that was coming.
After rattling off a list of poetic polarities, Dickens concluded that famous opening by saying, “In short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”
As it went in 18th century Europe, so it goes in the Permian Basin, year of Our Lord two thousand sixteen.
In this case the two cities are Midland and Odessa, standing alone in the desert, two silhouettes against the crisp sky, unmoving in the face of the West Texas wind. Around them only flat earth, above them sunshine, between them a distance of some miles ever shrinking, below them oil. Like any set of brothers, they have had their differences and occasionally friendly scuffles have broken into fisticuffs — just bring up white collar vs. blue collar stratigraphy in a mixed party of Midlanders and Odessans — but one thing unites the two: they’ve learned to weather a volatile economy that most people only see in terms of feast or famine.
Powered on by oil and gas, both Midland and Odessa face unique challenges stemming from this volatility in commodity prices. It’s high time to examine the ways that Midland and Odessa are affected by volatility, take steps to combat it, and move beyond the boom and bust narrative.
Growing Pains
No one living in either Midland or Odessa will need any convincing that both cities depend on oil and gas for their livelihood, but a look at the data reveals just how dramatically the industry affects the region. A Texas Tech study found that from 2005 to 2012, as the horizontal drilling revolution took off, the two cities experienced a 76 percent increase in income per capita. During that period, Midland and Odessa were often ranked in the top five fastest growing cities in the United States, which is startling if you consider that had the increases in the two cities been measured together, the rate of growth could have easily been double that of any other metropolitan area. The growth was dramatic and while that might seem like an unmediated boon, volatility almost always cuts severely and sharply in both directions.
In the midst of the growth period, the rapid change in economic activity chafed against the Basin’s unprepared workforce and infrastructure. The boost in population created a housing shortage that shot rent and real estate prices through the roof. Those working in the oil industry might have seen their personal incomes rise parallel to the costs of housing, but those that worked in other sectors of the economy found it increasingly difficult to find an affordable place to live, and newcomers to the region struggled to track down a hotel room, much less a permanent home. Increased oil field traffic clogged the Basin’s roads to the point where, in 2014, a fatal traffic accident occurred as frequently as once a week in Midland County. The population explosion also swamped the Basin’s restaurants, creating long lines and slower service as customers multiplied and workers were lured away to high paying oil field jobs.
These growing pains were evident to all, but the sentiment at the time was that they were all part of the march to sustainable growth and diversification. Unlike the 1980s boom, this new spurt would power the Permian Basin into position alongside Houston, Austin, and DFW as an economic center in Texas.
Then oil prices fell dramatically and revealed just how much the region still depends on oil and gas.
Shrinking Pains
Between June and December of 2014, oil prices declined 44 percent ($49), and the slide in prices continued throughout 2015. While hedged positions kept a lot of Permian players afloat, the oil and gas industry contracted consistently through the year 2015 and the reverberations were felt in both Midland and Odessa.
During that year, the Midland Development Corporation reported that over 15,500 jobs were lost in the Permian Basin. In December of 2015, hotel and motel tax receipts were down over 27 percent year-to-date and building permits were down 64 percent YTD. Rig counts, home sales, and the Texas Permian Basin Petroleum Index each saw similar double-digit percent declines YTD.
Now, while this data might seem to reinforce the boom and bust storyline, in reality, 2015’s decline was no true decline. Even with double-digit losses reported in several categories in 2015, those numbers don’t even come close to erasing the overall expansion that took place in the past couple of years. Things are slowing down, the future is uncertain, but we’re still miles ahead of where we used to be.
So while the boom and bust narrative is an incomplete picture at best, such dramatic market movement does affect the two cities. The Bureau of Labor Statistics showed that the industries most harmed in Odessa were manufacturing (-3.4 percent YTD) and leisure and hospitality (-1.3 percent YTD). Decline in both of these sectors could have been anticipated, as oil field equipment companies responded to slashed demand and Odessans tightened up on extracurricular spending. However, in Midland the BLS reported that the only industry to experience negative growth in 2015 was Education and Health Services, down a whopping -7.1 percent YTD.
At first, this stat might seem odd, but a closer look at the data reveals a particular problem Midland faces when oil prices rise and fall so severely, and highlights the need for the Permian Basin to look beyond the crests and troughs to a more stable future.
Hitting A Moving Target
The reason Midland’s Education and Health Services sector declined by 7.1 percent in 2015 is because MISD was facing a $54 million budget shortfall and had to cut a number of full-time employees. But the reason for that budget shortfall is much more complicated, and sheds light on how oil price volatility does affect Midland and Ector County in different ways.
In order to understand the problem facing MISD, one has to understand the way school districts are financed in Texas. Essentially, district budgets are determined by two main factors: attendance and property values. School districts receive money from the state depending on how many students attend class every day, and they also collect revenue from the county’s property taxes from the previous year. However, in the Permian Basin both of those numbers can change dramatically year to year, and make district budgeting more akin to soothsaying than accounting.
As if the uncertainty surrounding property values and population weren’t enough, a quirky state law further complicates the budgeting process, and can prevent each district from having the financial stability to properly fund itself.
The Robin Hood Recapture
In 1993, Edgewood ISD vs. Kirby was brought the issue of district funding before the Texas Supreme Court. The plaintiffs argued that while the Texas Constitution mandated an equal and efficient school system, huge discrepancies existed in school funding between poor areas and wealthy areas. Because property values play such a huge factor in district funding, property-rich areas like Dallas’s Highland Park or Austin’s Eanes ISD had much more money per student than did poorer areas with lower property values. Edgewood ISD argued that this disproportionate funding was untenable under the Texas Constitution and the Texas Supreme Court unanimously agreed.
In response, the Texas legislature passed a bill entitled Chapter 41, which put a ceiling on how much money per student a school district could raise from property taxes in a given year. Once that ceiling was reached, any additional property tax revenue would be recaptured by the State and distributed amongst the poorer school districts.
This law was obviously created with good intentions; students in property-poor areas shouldn’t be disadvantaged compared to students in property-rich areas where wealthy constituents, expensive homes, and high commercial real estate prices make raising revenue easier. However, legislators made the law with metropolitan areas in mind and did not anticipate the effects it might have on a place like Midland.
Between a Rock and a Hard Place
During the Basin’s latest growth spurt, the student count was expanding rapidly as young families flocked to the Basin for work. MISD needed to hire more staff to be able to manage the ballooning student count, but exponential growth in the regional economy was luring existing teachers away to lucrative jobs in the oil field. MISD just could not raise incentives high enough to get fully staffed. Midland County’s property values were growing as well, as mineral and real estate evaluations grew, but once MISD reached the money-per-student ceiling, the Robin Hood Recapture law took effect and pushed the district’s budget to the breaking point.
Ryder Warren, MISD’s superintendent, said, “The first year we had a recapture was 2013 and it was $15 million, then $33 million in 2014, and $50 million in 2015. We needed to hire folks to teach, administer, feed, and transport our kids, but our ability to keep up with the growth was severely limited by the Robin Hood Recapture.”
The oil industry’s growth was pushing wages up and bringing more and more students to Midland, but the Robin Hood law put a limit on how much MISD could grow alongside it. ECISD CFO David Harwell explained that while ECISD faced similar challenges, “MISD has a more extreme case because they have fewer students and higher property values than we do. The bigger the ratio between values and students, the higher your recapture will be.”
School district budgeting amongst economic uncertainty is incredibly difficult in the Permian Basin, especially with the Robin Hood Recapture in play. Harwell explained, “Value fluctuation has a big effect on our funding. Everything moves at the speed of light now, but the law is written to evaluate funding based on prior year values. So it’s a real rollercoaster when we see rapid changes in property values year to year.”
Going Forward, Together
This is just one example of the unique problems facing these two cities and further evidence that Midland and Odessa are different yet the same, apart and yet forever linked. Going forward, the region is going to continue to be vulnerable to oil price volatility, but together, both cities are working on ways to overcome those challenges.
Now that things have slowed down, Midland and Odessa have the opportunity to plan for the future. Robert Burns, president of the Midland Chamber of Commerce, said, “The Chamber is working with community leaders to take advantage of this slower time to make the needed investment into our infrastructure. History tells us that every single time the price of oil has dropped, it has rebounded. Therefore, it’s imperative that we seize this opportunity to invest in and prepare for future growth.”
He also emphasized the important bond between Midland and Odessa, saying, “It isn’t our goal to compete with Odessa. Rather, we want the Permian Basin to compete with Houston, Dallas, Austin, and the like for attracting the best industries and workforce.”
Scott Jones, director of economic development at the Odessa Chamber of Commerce, echoed those sentiments. “I can see Midland County from my doorstep and we’re growing together at a rapid pace. We’re collaborating more and more all the time, and really any new job to Odessa or Midland helps the region,” he said.
Jones is hard at work attracting new businesses to Odessa. He’s hoping to see the plastics manufacturing, logistics, and metal working industries grow in the Basin and bring increased diversity to the economy.
As for education, Midland and Ector county are both lobbying in Austin to change the education funding law, and cooperate on a host of initiatives that have the Basin’s school districts in mind.
Midland and Odessa may not ever be able to completely smooth out the bumpy ride their economies are so fond of taking, but with changes like these there’s hope that one day the Permian Basin can be known as something more than just a land of extremes.
Chase Beakley is a frequent contributor to Permian Basin Oil and Gas Magazine. He lives in Odessa.