Oil prices have been on a tear this year following a particularly awful performance last quarter. The price of West Texas Intermediate (WTI) – the most widely used pricing benchmark in the U.S. – tumbled more than 38% during the October-December period. WTI has since rebounded nearly 24% this year to $56.14 as of March 6, illustrating the confidence of investors in the current energy environment.
But the stability of said environment never lasts, and investors don’t have to look too far in the past to remember the devastating effects the fluctuating oil market has on the local economies near drilling areas. From June 2014 to January 2016, WTI shed 68% of its value, falling from $111.27 to a 13-year low of $35.70 per barrel, due to the advent of fracking and overwhelming fears of global supply glut. By 2015, the largest oilfield services companies – including Baker Hughes Inc. (BHI) and Schlumberger Ltd. (SLB) – had laid off more than 50,000 employees. Most of those employees reside in oil-rich areas where the price of oil often makes or breaks their livelihood.
Now with prices gaining steam again, the country’s largest producers have all the reason in the world to pump at record rates again.
But, as a statement from two oil majors on Tuesday highlights, higher oil revenues doesn’t always translate into economic well-being for the smaller producers and the areas they drill in…
On Tuesday, March 5, Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) – the two largest oil and gas companies in the U.S. by market capitalization, respectively – said they plan to significantly expand production in the southwestern Permian Basin over the next five years.
Exxon hopes to boost its current output to more than 1 million barrels a day by 2024. Chevron is similarly ambitious, with the firm looking to increase production from roughly 450,000 barrels per day to about 900,000 over the same time frame. That marks a nearly 40% upward revision from the previous production forecast.
Chevron CEO Mark Wirth commented on the Permian drilling frenzy and how it has become an extremely competitive game. He noted how the companies scaling the fastest would likely come out on top since “the race doesn’t go to the one who gets out of the starting blocks the fastest. The race goes to the one who steadily builds the strongest machine.”
The Bigger Picture
Holding nearly 33% of total U.S. crude supply, the Permian Basin is quite literally the new “gold rush.” Companies descended upon the oil-rich region years ago and haven’t looked back since, but the basin’s recent development during this bullish price climate has, in three primary ways, led to negative consequences for the people and businesses not associated with the U.S. oil majors.
The first involves the latter: businesses not associated with Exxon, Chevron, or other oil firms with deep pockets. These smaller producers, wildcatters, and exploration companies tapped the Permian long before their big brothers came in and left them behind.
But now, the majors with more employees and advanced drilling technology have managed to capitalize on the smaller firms’ success by snatching valuable Permian land right out from under them. For instance, the total value of Chevron’s shale portfolio – which primarily includes its Permian assets – reaches as high as $72 billion. Tinier drillers like ConocoPhillips (COP), on the other hand, only have $18 billion worth of shale assets in the Permian and other regions, merely a quarter of the value of Chevron’s.
The second negative consequence of the Permian shale boom is far less visible to market participants: the lack of affordable housing in small West Texas cities like Odessa and Midland that sit atop the Permian Basin.
While oil profits trickle down to the locals working for regional oil firms, workers outside the industry are hard-pressed to find homes priced within their means. In Midland, where the local economy reaps hundreds of millions of dollars from oil revenue, the median cost of a house sat near $256,600 this past January. That was up about 51% from January 2013 and up roughly 30% from 2016 when WTI dropped below $30 per barrel.
And the third negative consequence relates to that second negative consequence: West Texas is dealing with a dearth of teachers due to the fact that they can’t afford housing.
According to a report from The Wall Street Journal, school districts in the Permian region have difficulty recruiting teachers due to the exorbitant cost of living. The problem is even more urgent with enrollment numbers now growing at a rapid clip. The Texas Education Agency reports that Midland’s public school enrollment is up about 9% since 2014. The unaffordability – combined with the fact that districts have a tough time convincing qualified teachers to move to their remote towns for starting salaries as low as $40,000 – could trickle down to public schools that already operate on shoestring federal budgets.
Oil’s boom-and-bust cycle is nothing new; the profitability of energy giants depends solely on how the price of oil is behaving. Despite the highs and lows, these firms’ size ensures they will always be sustainable thanks to the diversity of their business away from petroleum and into sectors like solar, wind, and natural gas.
But the human cost of the oil cycle is worth taking into account. It’s hard to fathom how the towns at the Permian epicenter can still struggle when they’re awash in oil revenue. However, it’s important to note that blame can’t be placed solely on the oil industry, as many of these problems certainly expand beyond the scope of just the energy sector and into broader economic dysfunction.