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Is $100-a-Barrel Oil Good for Texas?

Posted on: Thursday, 3 January 2008, 09:00 CST

Bob Schumacher and C.B. Rust have been in the oil business long enough to remember when a Texas petroleum producer was lucky to get $3 for a barrel of crude oil. Until oil began its relentless push in recent years, neither expected that price to ever hit $100.

"As recently as 1999, we were as low as $10 or $12," said Rust, 60, who started his Fort Worth company, Rust Oil, in 1979. That year, crude oil, in the wake of the Iranian revolution, leaped from about $10 a barrel at the start of the year to $18 a barrel, which seemed like an extraordinary level at the time.

"Any of us could show you long-range projections, as recently as three or four years ago, with oil escalating to about $30 or $40 for 10 or 15 years," said Rust, whose company produces 200 to 300 barrels of oil a day from properties mostly in West Texas.

Instead, crude oil futures prices on the New York Mercantile Exchange have steadily risen since 2003 and briefly topped $100 on Wednesday before closing at $99.62 a barrel.

"That means a lot" to a company such as Fort Worth's Texland Petroleum, which Schumacher, 76, joined about 35 years ago and leads today. At about 7,000 barrels a day, Texland is among the area's largest crude oil producers. Wednesday's rise of $3.64 a barrel in the futures price was worth more than $25,000 in extra revenue to pay sharply higher drilling and production costs.

Although higher oil prices obviously benefit producers, their net impact on the state is harder to measure. Two economists who cover the state were split in their outlook.

"It's going to help and it's going to hurt," said Bill Sirakos, chief economist at Frost National Bank in San Antonio. "I think the net effect for the country, and probably for Texas, is a net negative." Consumers, he said, "are staring at $3.50 gasoline, if not more," while higher energy prices tend to slow the economy and can especially hurt major industries such as the automobile business.

Stephen Brown, an energy economist at the Dallas Federal Reserve Bank, said the oil industry has become a smaller part of the state economy as Texas has continued to diversify.

A 2005 study by Brown and fellow Fed economist Mine Yucel concluded that the petroleum industry's share of the Texas economy in 2002 was less than a third its share in 1981, when oil prices peaked at about $40 a barrel.

As a result, the study found, a 10 percent increase in oil prices produced a small increase in the state's output and no net change in employment. But a 50 percent increase is another matter, Brown said.

"These much higher prices have a much bigger effect," he said. "Texas is a high-cost producing area, and these prices are high enough to support more activity. We're seeing a much stronger response" in employment in the Oil Patch and the Houston area, home to some of the world's biggest makers of oilfield equipment.

He judges the sharply higher oil prices as a net benefit for the state. The Texas unemployment rate of 4.1 percent in November was better than the national rate of 4.5 percent. And the state's lowest jobless rates are in traditional oil-producing centers such as Midland, at 2.7 percent, and Odessa, at 3.2 percent.

Since 2003, the state's mining sector, which includes oil and gas production, has added 52,200 jobs at Texas employers, according to the Texas Workforce Commission. That amounts to a 37 percent gain.

In the same period, the state added 780,000 wage-and-salary jobs, a gain of 8 percent.

The added jobs in the industry are a reflection of the improved economics of petroleum production, said Jon Brumley, chairman of Encore Acquisition Corp. in Fort Worth. Unlike many other local operators that jumped heavily into natural gas and the Barnett Shale, about three-fourths of Encore's production is crude oil.

A higher oil price "increases the number of projects you can do significantly," said Brumley, 68, who has headed several petroleum producers in North Texas during his career. "You'll look at a well that produces just 25 barrels a day if it can bring you a return."

Like Rush and Schumacher, he said that in the days when oil was $3 a barrel, "I couldn't even dream it would go to $100. But once it got to about $90, I thought, 'Yeah, it could go to $100.'"

None of the economists or oilmen would hazard a guess about the future price of oil. All have seen oil prices yo-yo as supply and demand work on what is perhaps the world's most strategic commodity, but growing demand from the developing world is also a huge factor.

For example, the price of oil collapsed below $10 in 1986 after a frantic run-up just a few years earlier. "Conservation really does kick in," Brumley said. "We're all feeling it now. People start buying smaller cars, they turn down the thermostat."

In December, Congress passed rules requiring higher mileage for the nation's cars and trucks, a move that could cut demand for gasoline, the principal use of crude oil in the United States.

That kind of up-and-down history has made the old hands skeptical.

"You don't get too excited when things are good, and you don't cut your throat when things get bad," Rust said. "The cautious side of you says to enjoy it while it's here, because there will be a downturn.

"But that hasn't happened for two or three years. In a way, this day had to come. It's a finite resource, and someday it'll peak. It might have already, and we just don't know it yet. It's going to be an interesting decade."

25 cents Increase in gasoline prices for every $10 increase in the price of crude oil

$3.23 U.S. peak for average price of a gallon of regular unleaded gasoline, in August 2007

$5.50 Price that gasoline would have to reach to match 1981's peak in terms of gasoline's share of U.S. household budgets

$30 million What each 1-cent increase in jet fuel prices costs American Airlines each year

$475 million What each $1 increase in the price of crude oil costs U.S. airlines in higher jet fuel prices annually

15.2 million Barrels of crude oil used daily in the United States

66% Increase in U.S. energy efficiency between 1980 and 2005

Sources: U.S. Energy Department; Federal Reserve Bank of Dallas; Air Transport Association; American Airlines

At a glance

What's new: New York crude oil futures hit $100 a barrel for the first time Wednesday before settling up $3.64 to $99.62, a record high.

Inflation-adjusted: Highs of $38 a barrel, set in early 1980, would translate in today's dollars to $96 to $103 today.

Strategic Oil Reserve: The White House said Wednesday that it would not release oil from the nation's strategic reserves to drive prices lower and will continue buying more to add to them.

Gas prices: Pump prices rose 0.6 cent Wednesday to a national average of $3.049 a gallon, according to AAA and the Oil Price Information Service. The government forecast a peak price of $3.40 in May.

Source: Fort Worth Star-Telegram (Fort Worth, Texas)

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