WACO, Texas – Texas oil production has staged a remarkable comeback over the past few years, and the size and speed of the upswing are impressive and surprising to many people (including me).

I get asked a lot of questions about the oil business as I travel around the state; it’s a topic near and dear to many hearts. Here are some of the aspects of the current oil surge which I find most interesting.

If the Lone Star State were a country, it would rank among the top crude oil producers in the world behind Saudi Arabia, Russia, the United States as a whole, China, and Canada (and about even with Iraq and Iran).  Annual production is on pace to be about 770 million barrels this year, which is a level not seen since the late 1980s. While it’s still well below the 1.2 billion barrel range of the early 1970s, it’s a strong improvement from the 357 million barrels produced in 2010. In just three years (2010 to 2013), production rose enough to counter some 30 years of declines.

M. Ray Perryman
M. Ray Perryman

Look on any ranking of fastest-growing or top-performing cities, and you’re likely to see several Texas towns which are in and around oil-producing areas. The Permian Basin (including Midland, Odessa, and other communities across a wide swath of West Texas) has produced close to 30 billion barrels of oil in the decades since its discovery, and many experts believe there is even more than that still in the ground. The region is currently producing in excess of a million barrels of oil each day, up from less than 712,500 just five years ago. The Barnett Shale, located under and around the Metroplex, is primarily a natural gas formation, producing about 4.8 billion cubic feet per day. The Eagle Ford Shale in South Texas has seen amazing growth in oil production per day, from about 0 in 2008 to 15,000 in 2010 to 804,300 now. The Eagle Ford is also contributing nearly 3.5 billion cubic feet of natural gas. The Cline Shale is generating a lot of activity around San Angelo and northwest from there; the Granite Wash is adding to the action in the eastern Panhandle. There are others.

It remains to be seen how these shale plays will develop over time. As they mature, growth rates will naturally slow. It’s also unclear how quickly production will taper off. Regardless of your assumptions, though, it is clear that they will remain sources of economic activity for nearby areas for the foreseeable future.

The oil surge has been important to Texas’ recovery from the recent recession. Although direct employment in the industry is a small percentage of total jobs in the state, the work is often well paying. Moreover, the ripple effects through the economy of this high value-added industry are large. Oilfield services companies, engineering firms, pipeline builders, and others with ties to the industry are benefitting from the activity. In addition, a range of businesses taking care of the workforce are seeing higher sales and profits (restaurants, hotels, and so on). Housing markets in nearby towns are strong, and construction companies are landing contracts for new homes and commercial buildings to keep up with the economic expansion. Many Texans are also receiving royalty payments, which are finding their way back into the economy as well.

There is, of course, a downside. Cities are struggling to cope with an influx of new residents, and rising needs for infrastructure and services. In some areas, it is difficult to find and retain quality workers. In many regions, water supplies are very tight, and hydraulic fracturing requires fresh water (though the industry is working toward using brackish or reclaimed water). The industry uses only a small fraction of the overall total amount of water used in Texas, but many of the areas where drilling is intensive tend to be dry and drought prone. Also, heavy trucks and other traffic are wearing out and overloading roadways. It is an ongoing challenge to keep up with these and other infrastructure challenges, and adequate investments are critical to long-term quality of life for residents.

Texas has endured boom and bust cycles in the past, and there are understandable fears that these good times will be followed by bad. While cycles in the industry are inevitable, I do think this time is different. For one thing, we have “been there and done that” and many of the folks on corporate boards, bank loan committees, and city commissions remember the late 1980s downturn all too well. There is a greater sense of conservatism than there might be otherwise, as well as a realization that frenetic activity tends to settle down over time. There are also some very real contrasts to the damaging 1980s cycle ranging from world politics to price drivers to demand conditions. The current surge is likely to be with us for a while, providing an important source of stimulus to the Texas economy for years to come.

<I>Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.</I>