Big Oil's Terrible, No Good, Very Bad Month
It's been a rough go of it for the oil industry these days and it's a safe bet things won't be getting better anytime soon based on the first month of the year.
People started looking worried back in June when the oil prices began to slip. After all, the experts had said it was impossible for the boom -- the shale-driven oil boom that brought Texas to record production levels and sparked the Texas Miracle and a renaissance of U.S. oil that most thought was impossible -- to ever so much as sag, let alone to bust. And yet, the prices dropped.
Why, you ask? Well, as we've discussed before, there are lots of different reasons that the oil prices began dropping -- over-production and the fact that China and India didn't end up needing the amount of oil that everyone had expected, for instance. But the main reason is the good old Organization of the Petroleum Exporting Countries (aka OPEC) with the Saudis in particular leading the charge. And why were the Saudis so keen to keep their production gushing so that the global price of oil would sink? That's a good question, and the answer is that flooding the market when you have enough oil and wealth and control of your oil industry to do it is an excellent way of both punishing those you don't like so much (like, let's say, Russia and ISIS) and driving some of your competition out of business. You know, like the American oil producers who have been leading a U.S. energy renaissance the past few years and thus cutting into OPEC's market.
(If this sounds like a familiar song, it's pretty much exactly what OPEC did under similar circumstances and with even more economically devastating results about 30 years ago at the start of the infamous 1980s Texas oil bust. Yeah, you know, the one where no one had any work and all the banks started closing, and people were losing their houses. The whole period is generally viewed with a similar steely-eyed grimace by those who lived through it as is the Great Depression. Because it sucked.)
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Once again things seem to be working out exactly as the Saudis and/or OPEC or whatever, have hoped. Oil prices have declined 60 percent since that first bit of slippage in June and they are now stuck hovering around $46 per barrel, which is the lowest they've been in ages. And with prices that low for that long, the economic responses we've all been waiting for are starting to go into effect around the Lone Star State in the heart of the shale boom. That means things are most likely about to get rough for those in and around the energy industry in Houston. (Spoiler alert: we're all connected to oil somehow.)
The mergers -- which is a nice way of saying the process where healthy companies are working the angles to gobble up unhealthy ones -- started back in December, but now the layoffs are really coming down. First Baker Hughes and Halliburton announced (under the guise of a merger) they were cutting about 7,000 jobs earlier this month. Then Schlumberger, another big Houston player, announced they were laying off about 9,000 people.
All three of these companies were big in shale plays because they handled the bulk of the hydraulic fracturing (the pumping of sand, water and chemicals into the ground to shatter dense brittle shale and release the hydrocarbons trapped in the formation) that made the entire shale boom possible. They're the first to start cutting, but since most predictions are calling for oil to be stuck around $50 per barrel at best for the foreseeable future, things won't be getting better.
In fact, last month before oil had even dipped below the $50 mark, the Dallas Federal Reserve warned that Texas will be looking at an estimated 125,000 layoffs in the coming months. Basically, this is only a glimpse of what's coming if oil doesn't magically rebound. Texas oil drillers haven't seen the worst of it by any means. As Bloomberg reported on Friday, the Texas oil industry won't be properly hit with the cost of rock-bottom oil prices until the second quarter but then the whole situation will devolve.
And that's just on the employment front. Things will trickle down to that other little economic miracle of the Lone Star State, the housing boom. Just a little while back banking types were predicting a 14 percent increase in the Texas housing market, but now they're saying something completely different. Mainly they're calling for a 20 percent decline caused by all the layoffs that are coming plus the general nausea-inducing panic that jolts through all of Texas when actual signs of the end-of-boom-times start showing up too clear to ignore. Basically, short of another Texas miracle to boost prices back up to a range where the Texas oil industry starts hiring again, things are about to get deeply unpleasant from here on out.
There was a ray of hope -- in a twisted way -- when it was announced that King Abdullah, head of Saudi Arabia and thus OPEC, for all intents and purposes, had died last Thursday. Maybe the new guy would decide to call off the OPEC dogs and let the price settle out back to something that wouldn't potentially drive Texas into what could feel a whole lot like that Great Recession we missed out on back in 2008.
However, analysts are already saying there's essentially no way in hell that the next king will change the Saudi policy on flooding the market, and meanwhile the price for West Texas Intermediate, the benchmark for U.S. oil, actually fell on Friday. Yep, not only did nothing change on the policy front, things (i.e. the price of oil in Texas) actually got worse.