Tuesday, April 14, 2015

Shale bust

A friend of mine who is an economist in the oil and gas industry says everything works for suppliers when the price of a barrel of oil is $100. That is, $100 per barrel of oil makes all kinds of drilling profitable, from conventional oil wells to deep sea rigs to tar sands to shale fracking—without giving consumers sticker shock.

The last time WTI crude was at $100 per barrel was August. It’s been hovering around $50 since December. While this is great for consumers, prices are creating a counterrevolution in the drilling industry. Tar sands and shale fracking, which have fueled economic booms in western Canada, the Dakotas, and Texas, aren’t profitable. And credit is drying up to keep operations running, as there’s no end in sight to cheap oil.

Consequently, suppliers are shutting down and laying off workers. This time last year, there were 220 active rigs in the Eagle Ford shale formation in South Texas. This year, there are 125, a 42-percent decline, according to the weekly Baker Hughes Rig Count report. If Texas was at the forefront of the “recovery,” it’s at the forefront of the recession, contributing 47,000 of the 140,000 layoffs in the first quarter.

It’s as I feared. The Eagle Ford shale formation transformed South Texas from a ranching culture that had thrived for a hundred years to a drilling culture that boomed and busted in the span of five. This is how towns become ghost towns. They were muddling along when all of a sudden they’re dominated by a singular economic purpose, like striking it rich on a drilling lease, or a mining lease. Then market forces divert production, and the town is gutted of its human and economic capital. Worst of all, though, the shock of the boom blew up the cultural memory and infrastructure of the economy that thrived beforehand. Getting it back will be like picking up the pieces after a tornado.

For posterity, read these articles written during the shale boom:

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