Renowned economist Ray Perryman offers his diagnosis and prognosis of the current malaise in oil and gas.
By Al Pickett, special contributor
The most asked question in the oil patch today is when will oil prices turn around? Or how just low will crude oil prices fall? And just what does that mean to the booming Permian Basin economy?
Six months ago, oil prices were hovering around $80 per barrel after reaching $107 per barrel in June 2014. Then prices plummeted to under $50, even briefly dropping below $45 per barrel in mid-January. Obviously, the dramatic drop has caused companies to pull back their drilling programs.
“Major producing regions of the state, including the Permian Basin in West Texas and New Mexico and the Eagle Ford Shale in South Texas, are feeling the effects,” stated Dr. Ray Perryman, founder and president of The Perryman Group, an economic and financial analysis firm in Waco. “While some wells remain feasible at these prices, and the maintenance [including refracturing] of some existing shale wells will continue, exploration will slow dramatically, as well as opening new fields and developing marginal areas.”
Perryman is the author of The Perryman Economic Forecast, a subscription service detailing projections of state and metro area business activity, and The Perryman Report & Texas Letter, a newsletter providing vital information about various aspects of the Texas economy.
The recent success in unlocking the nation’s shale oil reserves and subsequent dramatic increase in production has led to a great increase in supply, which obviously has impacted crude oil prices. The shale boom also changed the dynamics of the global energy industry in fundamental ways. The origins and destinations of oil shipments are going through seismic shifts, and Perryman predicted technological advances stand to substantially alter both production costs and recoverable resources in the future.
But those are not the only causes of the dramatic drop in crude oil prices, according to Perryman. While oversupply is a key driver, economic growth also plays an important role. When economic growth slows, consumer demand declines, negatively impacting crude oil prices. The European market continues to be sluggish and the Russian economy fragile, both stunting the world’s economic situation.
There is another issue in play, too. Perryman claimed it is difficult to predict when oil prices will turn around because a key determining factor in the recent drop in prices is political, not economic.
“Although there is an oversupply and temporary softening in demand in the market, those factors alone would not cause such as an extreme drop in crude prices,” Perryman pointed out. “There are also some exchange rate effects as the dollar strengthens, but they are also insufficient to bring an adjustment of this magnitude. Instead, it is the decision process by key producing nations in OPEC that will most likely lead to the turnaround in prices in the future, which, of course, impacts supply, but, more importantly, expectations.”
The geopolitical issues are complicated, according to Perryman, and he said OPEC has multiple agendas, such as trying to slow down the shale development in the United States, keeping Russia in a situation that keeps natural gas flowing to the Ukraine and on to Western Europe, and discouraging long-term offshore investments.
“There is also tension within OPEC, as some countries desperately need higher prices,” he continued. “My best estimate is that prices will not fall much more and will begin to trend upward later this year, but that is based as much on trying to surmise the likely behavior of OPEC as anything else.”
While Perryman does not expect the current situation to persist for an extended period as it did in the 1980s and 1990s, he admitted it has created disruptions and a slowing in the rate of Texas economic growth. Many rigs have been stacked, awaiting a sustained rise in crude oil prices.
For example, the Baker Hughes rig count listed 368 rigs active in the Permian Basin in mid-February, compared to 486 rigs working in the region a year ago. Total rig count in Texas declined from 840 a year ago to 598 in mid-February. Business Monitor International noted recently that 11 of the nation’s largest oil and gas companies have reduced their capital expenditure budgets by an average of 19.7 percent for 2015 compared to 2014.
“I am projecting that these depressed oil prices will likely lead to a loss of 150,000 to 175,000 Texas jobs in 2015 when all factors and multiplier effects are considered, including the positive effects of lower prices on consumers and many producing sectors,” Perryman explained. “Texas gained over 400,000 jobs last year, and I am estimating that the rate of growth will slow to something in the 200,000 to 225,000 per year range. This level is consistent with the growth the state was seeing before the recent spurt in energy activity and remains a relatively healthy pace of expansion.”
While oil and gas exploration and production is the driving force of the Permian Basin economy, it represents only about 300,000 jobs statewide for those directly employed in the oil and gas industry compared to the 12 million people total working in Texas, according to Perryman.
“However, jobs in the industry tend to pay well,” he emphasized. “Capital investments are large, productivity levels are high, and multipliers are significant. Reductions in activity in the oil and gas industry therefore lead to a relatively larger economic fallout than that observed in other sectors. Clearly, the major oil producing regions will be affected far more negatively than other parts of the state, with notable slowing likely in the extremely rapid pace of growth in the Eagle Ford area of South Texas and the Permian Basin, as well as some other regions.”
While there are multiple factors in both the price decline and the likely rebound, Perryman said the bottom line is that prices are below the sustainable long-term equilibrium level and will undoubtedly rise.
“Exactly when and just how much remains to be seen,” he concluded.
Al Pickett is a freelance writer in Abilene and author of four books. He also owns the West Central Texas Oil Activity Index, a daily and weekly oil and gas reporting service. For more information, email firstname.lastname@example.org.