Turning the Corner
By: Dr. M. Ray Perryman
Published in syndication April 26, 2017
Things are definitely looking up in the oil and gas business, with more rigs, more jobs, and more spending. The economic benefits of this activity are rippling through the economy, and that is definitely good news. It looks like we may have turned the corner back toward expansion, though there are some signals that the recovery may face some challenges.
Across the country, mining added 11,000 jobs in March alone, with the vast majority of those in the "support activities for mining" category (which is where most drilling and related activity falls). Since the low point in October 2016, employment in the sector has expanded by about 35,000 nationwide. More than 7,000 of those jobs have been added here in Texas.
Rig counts are another sign of recovery. As of April 21, the Baker Hughes US rig count stood at 834, more than double the number of a year prior (401). In each of the past couple of weeks, about 10 new rigs have gone into action.
In Texas, there were 426 rigs running on April 21, up from 187 operating in the state a year ago. The Permian Basin has seen the number of active rigs jump from 136 a year ago to 340 now. All of the support industries have also kicked into high gear, and leasing activity is expanding at an amazing pace (particularly in the Permian Basin).
Given the fairly rapid growth in activity and employment, it's hard not to get excited about the expansion. However, it is important to note that it has only been going on for a few months and remains well below 2014 levels. It remains to be seen whether the momentum can be sustained. Prices are just below $50 per barrel as I write this, with supplies at high levels. Projections of price movements are all over the map. We could see a notable drop if supplies continue to rise and OPEC fails to extend production cuts. On the other hand, oil prices could rise substantially if tensions in the Middle East continue to escalate. The most likely pattern appears to be a slow rise as oversupplies are worked through and demand increases, but with all of the moving parts (some of them purely political), expectations could change rapidly.
As noted, even with the recent gains, there is still a long way to go to get back where we were. In December 2014, the peak of the recent surge, employment in the industry in Texas was 322,900 (according to US Bureau of Labor Statistics data for seasonally adjusted mining and logging employment, which in Texas is about 95% oil and gas related). The most recent data (February) places employment at 221,400, up 7,200 from the low point in September 2016. It's great news that the sector has added thousands of jobs over the past few months, but it's not so great that the total is still more than 100,000 below what it was in December 2014.
Whether the current recovery becomes a lasting expansion is partly a matter of timing. As wells are completed and new wells are drilled, production will start to trend upward. Some estimates place the output gain at a million barrels per day over the next couple of years, which could lead to worsening oversupplies, falling prices, and retrenching. The reaction of OPEC is also a consideration, given that their decision to cut production last year is part of the reason the US is seeing this upswing in activity. It looks like the political situation in Saudi Arabia and other key OPEC nations lends itself toward extending the cuts to keep prices higher, but there are no guarantees. Similarly, technology advances are notably lowering costs, but not in a linear fashion.
The oil and gas business has always been cyclical, and I don't see that changing. It seems clear that a corner has been turned and I think it has some staying power, but there remains significant uncertainty regarding future prices. I believe that the long-term prospects are good due to strong demand from emerging countries, but the journey will inevitably be bumpy. The current uptick in energy is good news for the Texas economy, and we may well see it continue and even intensify in the months to come.