Gas is cheap, jobs are plentiful and the economy is rolling.
This is why we love the free market.
In the last six months, the price of oil has fallen 36 percent, shaking producers, energy investors and some governments. Such steep drops used to be bad news, usually a signal of global recession. This time, a global glut is driving down oil prices, thanks largely to the shale boom that started in Texas.
“We’ve gone from scarcity to abundance,” said Bernard Weinstein, associate director of SMU’s Maguire Energy Institute. “The price of oil today is determined in North Dakota and Texas, not Saudi Arabia.”
Through September, Texas companies produced an average of 3 million barrels a day, almost three times as much as five years ago. In North Dakota, daily production topped 1 million barrels, five times the 2009 level.
If oil prices keep dropping, that will eventually slow new development and squeeze some U.S. players that borrowed heavily. But several petro states will feel more pain. Russia, Venezuela and Bahrain are among those heavily dependent on oil revenue, and current oil prices are below their break-even points.
The upside is that cheap energy is great for consumers and most businesses, enough to prompt economists to increase their growth projections for the U.S. economy. Last week, average gasoline prices in the U.S. were the lowest since the recession — almost a dollar lower per gallon than six months ago.
Consumers are saving about $350 million a day, AAA reported. That’s an average of roughly $90 a month for each American household, a nice holiday bonus. AAA predicts that prices could fall 20 cents further by New Year’s as the latest declines reach retailers.
Many businesses will get a windfall because they spend heavily on fuel. (Think hometown favorites American and Southwest airlines, for example.) Abundant, low-priced energy has also reignited manufacturing, especially in Texas petrochemicals.
Texas is in a sweet spot. It’s both a giant generator and a giant consumer of energy. The state economy is also highly diversified, so it could absorb a pullback in oil and gas jobs and new drilling.
It may not come to that, unless there’s a real rout on pricing. (At $40 a barrel, all bets would be off.) Producers have already made huge investments in Texas oil and gas fields. With constant improvements in hydraulic fracturing, today’s plays are more akin to a manufacturing process than wildcatting.
“There are no more dry holes,” Weinstein said.
U.S. producers are operating about the same number of rigs as three years ago and generating about 60 percent more oil and natural gas.
Don’t worry about a repeat of the 1980s oil bust that put Texas on its backside. While almost the same number of Texans work in the oil and gas business today, the state has added 5.3 million other jobs since then. Oil and gas employment here is roughly half the concentration of the 1982 peak.
In the 1980s, Texas real estate also cratered and most large banks in the state failed.
“Nothing like that is pressing us today,” said Mine Yucel, research director at the Federal Reserve Bank of Dallas.
Demand for oil has softened somewhat because China’s growth has slowed and Europe’s economy remains stalled. Gains in energy efficiency and wind and solar power are also having an effect in the U.S. and abroad.
But the big story is the production boom, driven by American innovations. A decade ago, no one predicted that shale development would upend the world of energy and make the United States the world’s No. 1 producer of oil and natural gas.
In Texas, that’s led to more jobs, more oil and gas, and lower prices.
“The market fundamentals are working,” Yucel said. “Increased supply is driving prices down. It’s like we’ve added another Canada to the oil market.”
The pattern is reminiscent of the natural gas boom. After prices hit near-peaks in the summer of 2008, they plunged with the recession. But as the economy recovered, natural gas prices remained low because shale production continued to grow. Prices for oil and gas went separate ways.
Low gas prices have become the new normal, pushing Texas electricity rates below the U.S. average and attracting scores of manufacturers eager to tap into the supply.
While that’s great for the economy at large, there have been some casualties. The state’s biggest power company, Dallas-based Energy Future Holdings, made a private equity bet on high gas prices in 2007. But as its price hedges rolled off, EFH couldn’t pay its debts and filed for bankruptcy last spring.
Investors will lose billions. Yet natural gas production in Texas keeps climbing, 3 percent in the first nine months of 2014.
For the rest of us, it will be cheap to heat our homes this winter — and drive our cars.
Follow Mitchell Schnurman on Twitter at @mitchschnurman.
marko on Sun, 7th Dec 2014 8:52 am
yes indeed magic , but magic of printing presses in DC
wildbourgman on Sun, 7th Dec 2014 9:25 am
Cheer leaders still cheer with no regard to the score!
Kenz300 on Sun, 7th Dec 2014 9:49 am
People in Texas are seeing the impact of lower oil prices……. that impact is not described in this article…
Apneaman on Sun, 7th Dec 2014 4:01 pm
That is so over the top that it actually satirizes itself. You could reprint in in The Onion and no one would know the difference.
Natural gas: The fracking fallacy
The United States is banking on decades of abundant natural gas to power its economic resurgence. That may be wishful thinking.
http://www.nature.com/news/natural-gas-the-fracking-fallacy-1.16430
Apneaman on Sun, 7th Dec 2014 6:12 pm
Hard Times in a Boom Town: Pennsylvanians Describe Costs of Fracking
http://www.desmogblog.com/2014/12/02/hard-times-boom-town-pennsylvania-residents-describe-costs-fracking
shallowsand on Mon, 8th Dec 2014 5:53 am
De Nile is not just a river in Egypt. In this business, when the bust comes, it comes fast and hits hard, after the initial lag. The more levered, the faster and harder it hits. However, there is a lag. In two weeks producers will be paid for oil priced last month. When they get the check in January that is below $60 oil, assuming we are still there or headed lower, the pink slips will start. Also, no one wants to can anyone before Christmas. At least not at the smaller privately held firms. The service cos will get it first. I would hate to be in the drilling or fracking business right now, or anything associated therewith, unless this price is a short term head fake. There will be a lag, and them the flood will hit. Would not want to own a highly levered hotel in shale areas either, especially Williston area.
Northwest Resident on Mon, 8th Dec 2014 9:43 am
shallowsand — Laid off oil industry workers have nothing to worry about. Reason why: They can all go to work building new homes — I kid you not.
One Big US Industry Will Be Happy To See Energy Companies Lay Off Workers
“Laborers in the US energy industry are nervously watching crashing oil prices as they wonder what persistently low prices could mean for their jobs.
According to a new report from The Sunday Times, energy giant BP has already begun laying off workers.
The good news is that laid-off workers might find an opportunity in another industry: the homebuilding industry.
Labor Shortages
There’s an ongoing debate about how much slack there is in the US labor market. It’s a complex topic. But one argument we hear repeatedly is that the quality of available labor is lacking.
Specifically, this is something we hear a lot from America’s homebuilders who say that new home sales would be higher if they could fill their job openings. Recent surveys from the National Association of Homebuilders reveal that labor shortages have only been getting worse for builders, subcontractors, and remodelers.”
So there you have it. The REAL reason that US home sales aren’t going through the roof is because the damned oil/energy industry has cornered all the good employees. And the good — no, GREAT — news is that once the oil/energy industry starts laying off workers, they can finally at long last start building all those new homes that everybody is chomping at the bit to buy.
All sarcasm aside, it looks to me like this is a big fat propaganda lie, the intent of which is to allay fears and concerns (and pullouts from invested positions) for just a little while longer. It reeks of desperation. When they start telling lies this big, so transparently full of crap, you know the grim reality isn’t very far away.
http://finance.yahoo.com/news/one-big-us-industry-happy-161614093.html
shallowsand on Mon, 8th Dec 2014 9:50 pm
I am sure that those laid off workers can pull up stakes again and start building houses for less than half the pay and benefits and be happy clams. Ha!
I’ll tell you NW, this is just something we are going to have to get used to. Happened six years ago, and happening again. Has many times throughout history.
rockman on Mon, 8th Dec 2014 10:21 pm
“There are no more dry holes,” Weinstein said.” There are dry holes drilled daily in Texas…I see the update every morning over my first cup. More important: there are many wells that are completed and produce oil/NG that will never recover 100% of their cost?
“Laid off oil industry workers have nothing to worry about. Reason why: They can all go to work building new homes.” Unfortunately not in Texas. My brother was in the construction business years ago and gave it up: he couldn’t win bids against contractors that used illegals. About 20 years ago a roofer could support a family reasonably well…not today. And now we’re faced with a new big and legal workforce for whom minimum wage is a boom. Nothing against immigrants of any fashion: just folks trying to improve their lives and those of their children. Can’t hold that against them IMHO. But more folks competing for the same number of jobs brings down every down.
Northwest Resident on Mon, 8th Dec 2014 11:27 pm
rockman — Exactly. The proposition that the only reason they haven’t been building more new homes is due to poor quality labor is a real laugher, a truly pathetic lie.
shallowsand — I have a bad feeling that this time around, it isn’t just a lot of oil workers who are going to be losing their jobs. I get the impression that we are heading into very difficult economic times. Most likely, the guys in the oil business who might find themselves out of work in the near future will be joined by many others. That’s my guess, and my prediction.
marmico on Tue, 9th Dec 2014 12:07 am
I have a bad feeling that this time around, it isn’t just a lot of oil workers who are going to be losing their jobs.
You mean like the ~1.7 million workers who lose their jobs every month due to layoffs or discharges– JOLTS. Cry me a river about oil patch jobs.
GregT on Tue, 9th Dec 2014 12:14 am
“I have a bad feeling that this time around, it isn’t just a lot of oil workers who are going to be losing their jobs.”
Theres going to be a lot of people losing their retirement funds as well, when the market casino is finally exposed.