Son of Oil Bust

MY WEST TEXAS FRIEND, WHOSE FATHER HAD been in the oil business and who by now had been in the oil business himself for nearly forty years, was gloomy, gloomy, gloomy. “I’ve never seen the Permian Basin this quiet,” he said. “Watch the rig count. That’s the main thing to watch, and the rig count in the Permian Basin has never been so low. There were only twenty-seven in Texas last week versus over one hundred this time last year. It didn’t get that low in ’86, and we thought that was awful. Now we are going to see something we are not familiar with. Now we don’t have second-tier companies who will absorb whoever is laid off from the bigger ones. It’s a real fundamental change. You can’t just hunker down and get through it. This isn’t a bunch of guys who were overspending. I don’t care how conservatively you manage your business, you can’t make it if your product is suddenly worth half what it used to be. I know a man who laid off his son. You know it’s rough when you lay off your son.”

The news of the huge merger between Mobil and Exxon highlighted the equally important news that the price for a barrel of oil was in a free fall. For ten years the price had fluctuated between $17 and $24. But by late December it was at $10.75, the lowest price in 26 years when adjusted for inflation, although by early January it had climbed back to $13. The layoffs my friend had alluded to hit everywhere. Halliburton in Dallas announced it would lay off 2,750 employees. For Baker Hughes of Houston, the number was 3,500. Across the state the total number of layoffs could be as many as 40,000 or even 50,000 people. As if that weren’t enough, the Los Angeles Times reported that the Houston Petroleum Club’s annual Fellowship Lunch in December served three hundred fewer prime ribs and three hundred fewer oyster soufflés than it had the year before. This all comes at a time when we are still at a standoff with Iraq, even after bombing them once again. The threat of a major disruption in the Middle East didn’t affect the price of oil at all.

In the United States we seem not the least concerned that oil supplies might dry up. My friend’s gloom seemed like a lonely cry compared with the bust of the eighties, when everyone was affected. Now, West Texas oil towns will suffer yet again and Houston will feel some effects, but the rest of Texas should be unaffected. The notion, prevalent in the seventies, that oil was a finite resource and might run out before the end of the century sounds quaint today. Oil never did go to $50 and certainly not to $100, as many supposedly reliable experts predicted back then. The earnest scolding about conservation, the 55-miles-per-hour speed limit, the automobiles that sacrificed comfort and performance for fuel efficiency, the efforts to develop alternate fuels like ethanol and alternate energy sources like wind or solar power—these all sound quaint as well. Oil has been cheap for fifteen years. These days in Texas we pay 50 cents per gallon in taxes, which means that gasoline itself costs less than 50 cents per gallon. That’s cheap energy, about the same as or less than we have been paying for thirty years.

Oil is a peculiar commodity in that, paradoxically, it can be sold in a stable free market as long as someone controls the price. Once the internal-combustion engine created major demand for oil, and once there were huge fields of oil discovered, it became apparent that pumping the fields dry as quickly as possible would produce so much oil in excess of demand (and destroy the fields at the same time) that the price could only go lower and lower. A producer could limit production, but that would force the price back up only if all producers limited production. In the end that is just what happened. When Texas controlled the world supply of oil, the Texas Railroad Commission, to enforce orderly drilling in the fields, set production levels for wells in Texas and thus controlled the world price. In the seventies the OPEC nations controlled the supply of oil and, by voluntarily limiting their production, controlled the international price. Over time, OPEC meetings have developed into a complicated form of liar’s poker. The members are all countries whose income is almost entirely from the sale of oil. Each country has its individual idea of what income it needs, and one country may want more income than the OPEC production limit would allow. A frequent response to this dilemma has been to lie. A country may lie about its level of production by claiming it to be higher than it is. Then if it is asked to cut production, it can cut “paper barrels” that were never going to be produced in the first place.

Nevertheless, the system has kept prices stable for fifteen years—until now. There are two basic reasons for the fall. One is Asia’s economic problems, which have reduced demand in oil’s biggest growth market. The second, far more important, involves Iraq, which, beginning in June, was allowed under the embargo to sell $5.2 billion worth of oil every 180 days. Since Iraq does not have the capacity to produce that much oil every 180 days, that decision effectively removed its oil industry from embargo, and Iraqi oil flowed onto the market. Meanwhile, OPEC countries, notably Saudi Arabia, did not cut their production. Thus there was an overabundance of oil and the price fell. This is how a decision on the other side of the world forces a man in Midland, Texas, to lay off his son.

What happens next? There are three principal theories. The first is the Return of OPEC Theory. In early January Ron Chernow, the author of the recent Titan: The Life of

More Texas Monthly

Loading, please wait...

Most Read

  • Viewed
  • Past:
  • 1 week