Monthly Article

May 2016 Monthly Article – Petroleum Swings

By Jerry Pacheco

Recently, I had business meetings throughout southeastern New Mexico. Over the course of a few days, I traveled from Roswell, south to Artesia, east to Lovington, down to Hobbs and finally ending with a stop in Carlsbad. During the stretch from Artesia to Hobbs, I took New Mexico Highway 82, a rural, two-lane road, through the heart of the region’s oil patch. I don’t remember being on this road previously, and I think I would because the huge concentration of oil rigs (pump jacks) dotting the landscape cast a memorable picture. Hundreds of pump jacks are perched in draws, on top of hills and right along the road – more pump jacks exist in this part of the country than trees.

Along my journey, crews in trucks that service the oil fields passed in the opposite direction. This part of my trip impressed upon me how many people depend on petroleum for their livelihoods and how vulnerable they are to swings in world prices. At times, Eddy County, New Mexico is the most productive crude producer in the nation, and seeing the proliferation of pump jacks made me realize why.

The Permian Basin, which stretches from southeastern New Mexico to west Texas, is rich in petroleum. Colleagues of mine in the business tell me that if you have to be involved in petroleum during these difficult days, the Permian Basin, because of its efficiency in extracting crude, is the place to be. Other oil-producing regions, such as the Bakken Basin in North Dakota and the Eagle Ford Basin farther south in Texas, are less competitive in terms of their efficiencies and costs in extracting the black gold.

The Permian Basin, like the others, is feeling the economic effects of the drop in world oil prices. As I drove to Hobbs, I observed that approximately one out of four pump jacks was bobbing. The others stood frozen as if they were asleep or paralyzed. Texas’s exports to the world were down by nearly 13 percent in 2015, as oil and oil-related exports fell as a percentage of the total. New Mexico’s overall exports were down by only one percent in 2015, but the money that the state has available in its budget has shrunk dramatically.

In my job, I see how drops in oil prices affect the capital that states such as New Mexico and Texas have available for expenditures on infrastructure, such as roads and water projects. There is a human element in the petroleum industry that we generally don’t read in reports or see first-hand like I did on my trip – even in the sense that it was easy to find a reasonably-priced hotel room in Hobbs, which would have been difficult a year ago. I imagine that even in the lodging industry people have been laid off or have had their hours cut.

During my trip, I sat down with businesspeople, government officials, and economic development professionals to get a sense of how they are handling the economic downturn in a region so heavily dependent on world oil prices. To their credit, government officials have set aside money to keep their operations running during economic troughs. Economic development groups have bolstered the reserve line items in their budgets, anticipating the cyclical nature of the petroleum industry, or a rainy day, which is now upon them.

In every economic crisis, there is opportunity, and the oil patch is no exception. Almost every company I met with that depends heavily on petroleum production is hungry to diversify their business to smooth out the swings in oil prices. A lot of these businesses manufacture products or offer services that can be used in other industries, and now might be the ideal time to explore new markets. When petroleum prices go back up and the industry is healthy again, their diversification will better allow them to handle future economic downturns.

There are also opportunities within the petroleum industry itself. Weaker companies become prime targets for stronger companies to economically acquire them. Most of my petroleum contacts also are telling me that it is very cheap to start new drilling projects, as the petroleum service sector is extremely eager for work in order to maintain workers. Companies that have the wherewithal to invest, based on the premise that oil prices will again rise to attractive levels in the future, can see tremendous benefits if they have the staying power.

States that have petroleum reserves are blessed, due to the demand of this resource and the economic multiplier effect it has on local economies. They are also cursed in the sense that communities in the middle of oil patches are subject to factors on world markets that are beyond their control. Saving for the inevitable rainy day and diversification are the keys in weathering the cycle of boom and bust for these communities.