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Page added on November 24, 2014

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Texas oil boom starts taking hits from cheap gas


Falling oil prices are causing some drilling companies to cut back on operations in Texas.

Baker Hughes Inc. recently reported shutting down four of its rigs in the Permian Basin of Texas and New Mexico.  Oil rig counts have also dropped in North Dakota’s Bakken shale formation.

From this year’s peak, oil prices have dropped 29 percent and are causing a slowdown in oil drilling operations.  Since 2010, gasoline at the pump has reached an all-time low of under $3 per gallon, and crude oil is trading below $80 per barrel.

According to Mike W. Thomas of the San Antonio Business Journal, “West Texas Intermediate crude for January delivery settled at $76.51 a barrel recently on the New York Mercantile Exchange.”

Pulitzer Prize-winning oil historian and vice chairman of IHS Inc. Daniel Yergin said that oil prices in the lower $70s over a period of six months would slow oil production in the U.S., and now those who have rented rigs for the year are starting to see the impacts.

10 Comments on "Texas oil boom starts taking hits from cheap gas"

  1. trickydick on Mon, 24th Nov 2014 7:53 pm 

    I work at a health insurance firm. I see the payrolls, the hiring and the firing of several fracking companies, nursing companies and gaming companies. They all seem to have hit their apex of hiring. I was expecting it.

    A coworker mentioned to me that the data from xyz company might be wrong, because there were so few new hires for the last couple of weeks. I said nope, take a look at the terminations, that’s where the activity is now. Hiring has slowed tremendously, after a long expansion. One of our larger companies used to send us a midweek activity report, due to the heavy volume. I haven’t seen one of those in five weeks. It’s not even discussed as being missing.

    CEOs must be able to see the coming doom, despite all the endless upbeat talk about how great things are and how great that means they will be in the future. They are trimming the payroll ahead of time. Meanwhile, our company is expanding the sales force. It will be tough sledding for them next year.

  2. rockman on Tue, 25th Nov 2014 7:10 am 

    dick – Folks who haven’t focused on the oil patch before might be shocked when they see the potential body count from the service companies develop. Operating companies tend to be much slower adjusting the work force. Service companies tend to pull the trigger not only faster but on a much bigger scale: I’ve seen a single contractor cut 5,000 jobs in ONE DAY. For these companies the economics are very simple: less work…less revenue. Doesn’t matter what the expectations are for future activity: if business picks up they’ll hire more bodies then.

    Obviously folks should be watch for a big hit at Baker Hughes: besides a slow up in activity they have many divisions that duplicate those at Halliburton. And many of the 102 VP’s at BH already have Halliburton VP’s running comparable divisions.

  3. Kenz300 on Tue, 25th Nov 2014 9:32 am 

    Looks like the drop in oil prices is having the intended effect of slowing down the competition from shale, tar sands, deep water drilling and other expensive or risky plays………..

    That shake out and reduction in capital spending will help to stabilize oil prices in the future.

    Lower oil prices will be bad for some producers but it will be good for the world economy. Most economies could use the boost low oil prices will give them. The Great Recession has done a lot of damage. We are still working our way out of it. Lower oil prices will help.

    Enjoy the lower oil prices while they last……. as the economy picks up again so will oil prices.

  4. wildbourgman on Tue, 25th Nov 2014 12:11 pm 

    If the Shale bubble has the right Wall Street investers Obama may just bail them out. Has Goldman Sachs invested much in the Shale Miracle? Maybe we can have a TARP program for the oilfield?

  5. rockman on Tue, 25th Nov 2014 2:56 pm 

    Wildman – As if folks think we’re too big to fail. Most think we should fail because we’re too big. LOL. Of course, that doesn’t include the Wall Street club, of course.

  6. zaphod42 on Tue, 25th Nov 2014 3:31 pm 

    Light, sweet, oil is at $73.94 as I write.

    With the news that Bakken rigs are being shut down, and given the need for continuous drilling in ‘shale oil’ in general, just to maintain production, my expectation is a rather rapid decrease in production. I expect that would create a supply imbalance and a resulting increase the price of oil, and after we rinse and repeat several times, we will experience extraordinary volatility in the price of oil.

    As that ‘jittery’ behavior expands to outside of the industry, I will be interested to see whether or not there are sympathetic harmonic fluxuations in other markets, and ultimately whether this could set up to, in a manner of speaking, shake apart the economy.

    Or not.

    Very interesting times, indeed.


  7. agramante on Tue, 25th Nov 2014 8:33 pm 

    Craig-further on that point. With current speculation that OPEC might try to restrain production to bring prices back up, I think the natural market impact on the fracking industry might have the same effect. And I’d hazard the guess that the strategists in Saudi Arabia are aware of this, and are counting on the oil shale industry to absorb the bulk of the necessary losses to start forcing prices back up again. Just a guess on my part, though.

  8. rockman on Wed, 26th Nov 2014 8:11 am 

    ag – “…the oil shale industry to absorb the bulk of the necessary losses to start forcing prices back up again.” What loses do you envision? Continuing to drill if the wells don’t provide the required rate of return? No guessing required…they won’t. Lose revenue by cutting back their production rate waiting for higher oil prices? Perhaps a very few might but not only would the great majority keep producing but some will do what they can to increase their production rates: maintaining max cash flow will be even more critical at the lower price.

    But as I pointed out earlier the US oil patch will return to the shales quickly once the price support redevelops. They have no choice. If the KSA is willing to lose $70+ BILLION per year by holding down oil prices in the hopes of eliminating future US production increases they obviously know nothing about the oil patch here. But I’m pretty sure they understand exactly how we function. And if the low prices persist for at least a year it might delay some of our Deep Water projects. But those projects are based upon oil price expectations years into the future…not just the next year or two.

  9. agramante on Wed, 26th Nov 2014 6:13 pm 

    Wow, Rock, I’m not even a professional investor, and I don’t know how many of them saw this price decline coming. I only know what I’ve read in a handful of articles, which is that, if the price continues going down, shale drillers will leverage themselves further to try to ride out the downturn, but that’s a short-term strategy that could sink them if prices stay where they are for too long, or go much further down. Whether prices will continue to go down…I agree with the analysis that it’s weakening demand in China, whose export economy is finally suffering from the global downturn, which has led to this decline in oil price. I can’t say how volatile the oil market is to demand fluctuations, so whether OPEC and the others could eventually cut production to boost prices again, I don’t know. But I guess my real point is, they will have no problem letting the American shale industry be the first casualty to this price drop. Could oil go as low as $30/barrel? I doubt it, but I have only a hazy feeling on that, and no logic to back it up.

  10. agramante on Wed, 26th Nov 2014 6:16 pm 

    Rethinking your reply. I guess I phrased my original comment poorly. I didn’t mean that shale producers would cut back. I agree with you: they can’t. Even at lower prices, they need to produce as much as they can to maintain the greatest cash flow they’re able. But at some point the piper must be paid, and if they can’t, they fold. Bankruptcy and ceasing of operations is what I mean. Do you think any company that takes a failed shale producer into receivership would try to continue (money-bleeding) ops? I feel on safer ground here guessing not.

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