Oil's Well!

Oil's Well! Main Photo

19 Jul 2021

By: Dr. M. Ray Perryman - The Perryman Group

Published in syndication July 14, 2021

The energy sector remains a key driver of the Texas economy. It dominates state exports; drilling, production, transportation, and processing activity involve substantial investments; and the massive supply chain has been entrenched and expanding for over a century. Although the Texas economy is diverse and multifaceted, oil and gas and related activity from exploration through shipping comprise about 13-14% of overall business activity.

The pandemic spawned sheer chaos in oil markets, with prices falling from the upper $50s per barrel to the mid-teens just two months later. In fact, futures prices even went negative for certain contracts. The decline was caused by a combination of plummeting demand (from over 100 million barrels per day to as low as 72 million) as economies and industries around the world ceased or curtailed operations and major producers initially failed to meaningfully cut production.

Needless to say, the industry soon went into rapid shutdown mode, with rig counts in the Permian Basin falling from over 400 to just 117 in August 2020. Unlike previous downturns, however, the debacle was caused by a health crisis rather than a major structural or market problem, and prices and activity began to pick up fairly quickly. The latest rig count in the Permian Basin stands at 237, and prices are around $75 per barrel. Oil prices are always volatile, but current patterns suggest they are likely to trend upward in the coming months.

Current conditions are sustainable and, indeed, profitable for producers, particularly given that production costs had been falling rapidly for years before the pandemic. In addition, the enormous supply glut has been largely worked through. Demand is already about 97 million barrels per day, and I expect a new record next year. Given this situation, the recovery is a bit more subdued than might normally be expected.

One reason is that OPEC can't seem to decide on future production levels. Even countries which are usually allies are disagreeing over potential supply increases and the best path forward. Although none of the options under consideration would dramatically alter the market, the lack of cohesiveness breeds uncertainty. The uptick in COVID cases and longer-term concerns over climate policy are also making folks skittish.

Another contributing factor is that some firms are taking a breather to replenish cash, pay investors, or reduce debt with existing production before engaging in major drilling programs. The pandemic caused major financial losses and hindered capital availability.

Underneath all of this brouhaha, however, lies one fundamental and unalterable fact. While there will doubtless be bumps along the way, the world needs massive amounts of energy for future growth, and Texas will be a major source of supply for decades to come. Stay safe!

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