Texas remains on track to produce a record amount of crude despite the lingering downturn that’s shut down rigs and spurred oil companies to lay off tens of thousands of workers.
Even as oil companies pare their spending budgets and pull back from some drilling activity, production in Texas has continued surging toward all-time highs, said Karr Ingham, an economist for the Texas Alliance of Energy Producers, at his twice-per-year assessment of the state’s oil industry on Monday.
Statewide oil output is expected to reach 1.28 billion barrels this year, exceeding the state’s record of 1.26 billion barrels set in 1972, Ingham said.
The resiliency of the state’s production numbers came as a surprise to Ingham, who had expected output to fall along with oil prices. Last July, before crude collapsed, Ingham predicted that Texas would break its 1972 record within two years.
After prices declined and hundreds of rigs were idled, Ingham began to doubt his forecast. But producers have continued to wrangle more oil from the ground than they did a year ago, with output in Texas ticking up 17 percent from the same time last year. That’s despite a 45 percent decline in the price for domestic benchmark crude.
“I don’t see any way at all now that we don’t continue to grow production in Texas for the balance of the year,” he said. “We certainly have for the first part of the year. It almost can’t drop fast enough to keep this from happening.”
The surge in production spells bad news for the future of oil prices, which have collapsed mostly because oil companies have flooded the world with more crude than it can use. Domestic benchmark crude fell 75 cents to close $47.39 on Monday, the lowest price since mid-March and less than half its peak above $100 per barrel in June 2014.
The downturn has been acutely tough for Texas, which relies heavily on oil and gas revenue to fuel its economy. An index developed by Ingham to gauge the health of Texas’ oil industry hit a record high of 312 in October before plummeting to 256 in June. The Texas Petro Index has measured job numbers, rig activity and production totals for nearly two decades.
Since oil prices started falling last year, oil and gas rigs have fallen 60 percent in Texas, according to Baker Hughes. Ingham said drilling permits had fallen, and that completions had decreased by 33 percent.
Upstream oil and gas companies have laid off more than 20,000 workers in the state and more job cuts are likely on the way, Ingham said. He expects Texas to lose up to 50,000 upstream jobs from the peak employment of 305,000 set in December.
This slump may seem like it’s hanging on longer than some expected, but Ingham said the industry is still in the nascent days of the downturn, especially compared to prior cycles. A previous downturn in 2008-09 lasted 13 months and reversed as a surge in oil production helped prop up prices, Ingham said, a dramatically different situation than oil companies now find themselves.
“We’re actually fairly early on into this cycle of contraction,” he said.
The fresh plunge in prices after stabilizing in the $60 range since mid-April has dashed hopes of a recovery to $80 to $90 per barrel anytime soon, Ingham said. There’s not enough global demand to soak up the millions of barrels of excess crude added to the market each day, and as production stubbornly refuses to budge, there seems to be no end in sight to the imbalance keeping a lid on crude prices, Ingham said.
“If you were hoping going into this year and late last year as prices were going down, and my goodness, I saw a lot of people saying just this: ‘Prices will be back up to $80 by the end of 2015.’ Well, that would be a miraculous outcome in the current set of market circumstances,” he said.
Instead, oil prices will likely have to drop much further to curb production and provide market incentive to prop prices up again, Ingham said.