In West Texas, rising oil prices are fueling a sharp economic upswing,
lifting employment and pay to records, driving up spending at hotels,
restaurants, and car dealerships, and raising the cost of housing and other
essentials.
This parched patch of land, under which lies the largest oil-producing
rock formations in the United States, is the epicenter of a growth binge that
shows just how tight the link remains between low unemployment, rising wages,
and upward pricing pressure.
After a two-year crash, the price of crude CLc1 began to recover in 2016
and pierced $60 a barrel early this year. But oil is still far cheaper than at
the peak of the previous eight-year boom that began in 2006 North Dakota’s
Bakken oil patch and supercharged the city of Williston.
In the Permian basin, which stretches across West Texas and eastern New
Mexico, the latest boom is being helped by advances in technology that allow
drillers to extract much more from each acre.
“$60 is like the new $100,” said Dallas Fed economist Michael Plante in
a mid-April interview.
Breakeven costs are now as little as $25 per barrel, according to the
Dallas Fed’s most recent survey, so energy companies here no longer need $100
oil to make lots of money.
And Midland and its neighbor Odessa, the biggest towns for miles and the
regional base for major oil producers in the Permian Basin, including
Occidental Petroleum Corp (OXY.N), Chevron Corp (CVX.N), Apache Corp (APA.N) and Pioneer Natural Resources Co (PXD.N), are feeling the surge.
“It is a full-fledged boom,” says Dale Redman, chief executive of
Propetro, a Midland, Texas, firm that supplies heavyduty horsepower to drill
sites, where energy companies coax crude from the ground with sand and water.
He has tripled his workforce since early 2016, drawing workers from
towns and cities hundreds of miles away. Over half of his 1,200 employees make
more than $100,000. “What it has done is raised wages for all these folks. But
housing and the cost of living has gone up as well.”
To Midland Mayor Jerry Morales, “It’s a good story right now.” He says
the city is trying to keep up with the drop in housing inventory and rise in
rents by approving new apartment complexes and working with developers to put
in water and sewer pipes.
But as owner of two restaurants in town, including Gerardo’s Casita, he
sees the other side too.
“The biggest problem I face is low unemployment - finding workers,” he
said in a phone interview, adding that he is increasing pay every six months to
keep staff from leaving for other jobs, and he is hiking his menu prices as
well.
MACROECONOMIC IMPLICATIONS
Investment by the energy sector, for years a drag on growth, has in
recent quarters begun to add to it, U.S. government figures show. But oil is
only about 2 percent of U.S. GDP, says Kilian Lutz an economics professor at
the University of Michigan. That limits the effect of swings in the industry on
the overall economy.
And though exports of oil have increased, helping to shrink the U.S.
trade deficit in energy by half from fourth quarter 2016 to fourth quarter
2017, the improvement has had negligible impact on the much larger overall U.S.
trade deficit, which grew during that period.
But as an object lesson in the connection between low unemployment and
rising prices, Midland and Odessa does have macroeconomic implications.
On a national level, wage growth and inflation have remained
surprisingly subdued even after 90 consecutive months of jobs gains, and an
unemployment rate of 4.1 percent and expected to head still lower.
“If the rest of the country starts to look more like West Texas...then
we will certainly see stronger wage gains” nationally, said David Berson, chief
economist for Nationwide Mutual.
Berson predicts that when wage gains start to accelerate nationally,
probably by early next year, they will boost inflation more than expected.
JOBS JUMP, TRUCK SALES SURGE, RENTS RISE
Oil companies are drilling wells faster, and putting more wells on a
single site, using technology to find the best angles and depths to get the
most out of each layer of shale.
That has helped boost per-employee output by Texas oil and gas companies
to an estimated $820,000, according to Waco, Texas-based economist Ray
Perryman.
“Companies are making enough money to be able to afford to pay higher
wages,” he said.
Unemployment was 3.2 percent in Odessa and 2.5 percent in Midland in February.
Average weekly earnings in March hit records in both towns, which have a
combined population of about 250,000. Sales tax receipts have soared.
“You have people that move in, you train them and then someone else
offers them a job: there is constant raiding going on,” says Jeff Sparks, chief
operating officer of family-owned Discovery Oil in Midland, who has only
recently shifted to the more efficient and capital-intensive drilling
techniques that have pushed per-barrel extraction costs down so steeply.
EXPANSION PLANS
At the Odessa car dealership the Sewell family has run since 1935, Colin
Sewell sold 1,073 trucks in the first three months of this year, up from 670
last year. He is building a brand new service center on the outskirts of town.
Jason Tarulli, senior project manager at general contractor UEB, is
using an out-of-town crew to build a downtown Odessa construction project he is
overseeing, because local hiring would have been impossible.
His costs are rising; rent for a one bedroom in his building rose by
more than $1,000 in less than a year, to $3,630.
Everyone who has lived here a while knows that the boom is not going to
last, including Sondra Eoff, who is footing about half the $80 million bill for
the downtown project, meant to help keep the town vibrant for the longrun and
not just during boomtimes.
Click here for the original article from Reuters.