The Other Side of the U.S. Oil Boom

by | published August 6th, 2013

It’s boom time in Texas. From the Eagle Ford shale to the Permian Basin it’s practically raining money.

Now you would think that would be a positive for the local economies. But as this boom unfolds, it is not without its own share of problems.

In its wake, the production largess in Texas has led to fast rising electricity costs. This counter force is wreaking havoc on localities across the region, especially small businesses.

In fact, a number of local non-oil end users have already reported a 20-25% increase in electricity costs, with more expected to follow.

It is the other side of the latest Texas oil boom and it’s an example of how energy costs can actually go higher as the volume of crude surges.

That’s because drilling for oil is a very power-intensive undertaking, as are the associated services of maintaining pressure, operating separation and running the related initial field processing equipment. Not to mention the ancillary usages of electricity ranging from field office lighting to dust control.

As a result the region encompassing El Paso in Texas and Las Cruces in New Mexico now has an expanding power deficit.

It is one of several examples how the resurgence of one energy source can result in adverse pressures on another…

Trouble on the Grid

In what is developing into a drilling frenzy – caused by a combination of rising crude prices and a greater reliance on domestic production to meet U.S. market demand – the increased power demanded has outstripped the ability of the regional grid.

As the demand for the power increases, so also does the price of that electricity.

And whenever this type of industrial demand ramps up, the greater bulk users tend to benefit the most. Even though overall electricity prices are increasing, the prorated portion earmarked for the largest user results in a net advantage in actual unit costs.

On the other hand, smaller (almost always local) businesses will realize a higher spike.

Now sometimes this will even out moving forward, as the profitability in the regional economy “trickles down” elevated sales and revenues to other sectors.

However, that is often not the case with oil and natural gas production, at least in the near and medium term.

That is because, while there will be some residual advantage to local service and material providers when the enhanced drilling programs are introduced, most of the profits move elsewhere.

And Texas is not alone…

What is going on with electricity in parts of the Southwest has been paralleled in other parts of the country.

The advent of rapidly advancing drilling expenditures have resulted in significant infrastructure and social services erosions, labor and material disruptions, combined with big increases in local inflation.

Already, parts of the Bakken and Williston basins in North Dakota and the Marcellus in Pennsylvania have provided examples of these types of dislocations. These have followed similar and earlier indicators from the Barnett between Fort Worth and Denton further north in Texas.

I happen to have experience in all of these basins. And I can promise you that the distortions to the local economies remain well after the drilling has moved elsewhere.

The Pain of 450% Inflation

Much of this is manifested in sector and regional inflation. With the arrival of large outlays at oil and gas plays, prices for all manner of commodities are raised hitting local residents head on.

In fact, I have encountered a number of examples of this over the past decade.

One happened in a small town in the Bakken where apartment rentals increased on average more than 450% in three months.

And there was an earlier experience I had in the small hamlet of Cresson, southwest of Fort Worth. The menu prices at the local diner had changed so often (always up), they were merely scratched out in pencil.

Another was provided to me by a colorful township committeeman in western Pennsylvania. “If I see another pickup truck with an Oklahoma license plate,” he told me one morning, “I’m going to shoot somebody.”

It seemed to me a rather distinct way of putting the local disappointment with the lack of well-paying drilling jobs.

But the same fellow noted another problem…

He recounted to me a (rather long) story about recent repairs to the pipes in his house that cost three times more than the last time he had them fixed. Why? “Because all the elbow joints are needed first up at the well sites,” he finally told me.

Without exception, the worst situation as the drilling rigs pull into town is to be a resident on a fixed income!

These distortions are inevitable when massive investment changes take place in small communities. They also oblige that state and national officials provide adequate “impact fees” to those affected.

Robbing Peter to Pay Paul

But what is currently underway in places like El Paso and Las Cruces is different.

Here, they are experiencing a genuine rift in the system providing available energy, a rift itself resulting from the production of another energy source. Events such as these require we consider something else.

As I have addressed several times before in these pages,the energy balance is under strain in Texas and elsewhere.

That’s why we need to stop regarding energies by their labels (oil, gas, electricity, coal; conventional, unconventional, alternative, renewable), as distinct sources.

Rather, the real objective must be to develop a genuine energy balance encompassing as many sources as possible, providing both interchangeability and integration. In this case, regarding the next energy breakthrough as the silver bullet to replace oil misses the real objective.

That objective has to be a widening network of sources in an interconnected network.

Otherwise, as in parts southern Texas and New Mexico today, we will just be robbing some of Peter’s energy to provide for Paul’s.

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  1. Max Eubank
    August 6th, 2013 at 11:41 | #1

    Look at the potential for the “Cline Shale” in West Texas. It covers a very large area and should have a very large reserve for oil and gas. Firewheel Energy is one of the small companies involved (150,000 acres)
    I really enjoy reading your ideas.

    Max Eubank

  2. Gary Schlosser
    August 6th, 2013 at 12:38 | #2

    Dr. Moors:
    Appreciate your analysis. Probably you are one of the best of Money Morning. Intelligent and informative to read. Thank you, Thank you, Thank you

  3. Jere Reid
    August 6th, 2013 at 14:07 | #3

    Dr. Moors:
    Living on the East side of the state of New Mexico we have a oil and gas boom. We have the same problems you mention and I can’t agree more with your assessment of the situation. JKR

  4. Ed Invests
    August 6th, 2013 at 20:43 | #4

    I don’t think you emphasized the effect on infrastructure enough. I live just outside of Fort Worth on the southeast side with small county roads never intended for regular use by large and heavy trucks. There are about 8 wells within a mile of my home and the roads stay in terrible condition. One was repaved two years ago and is already in terrible shape again. Any revenue recieved by the county from those wells would not be enough to make the roads strong enough to support even the sustaining traffic required by the wells. Sadly, even if the wells were required to pay a fee for road maintence, I doubt the money would be used for that, but spent somewhere else in the budget.

  5. August 6th, 2013 at 22:22 | #5

    Why don’t you recommend the drillers convert the flare off at the sites to Capstone Turbine (CPST). They turn the burn off into electricity; thereby saving electricity use.

  6. Sharron
    August 7th, 2013 at 19:48 | #6

    Thank you for bringing forth ramifications I hadn’t considered. “All that glitters…” Though I understand you cannot personnaly answer questions, I’m interested in any links to where I can read more about the changing social structures in these “boom town” areas? Families moving in…families moving out; increased need for housing, schools, medical, neighborhood shopping, and social services, for example, might lead to a variety of investments, but maybe this is territory that is too “new” for speculation. On the other hand, perhaps certain types of REIT’s (Real Estate Investment Trusts) would be appropriate in these locations, at least for the short haul. Anyone doing research on this?

  7. August 8th, 2013 at 16:45 | #7

    Yuk! So much for $1.25 a gallon gasoline. These booms are really driven by free enterprise on the end of the scale marked ‘Greed’. The companies come in and under contract, destroy the area water tables, the roads, the delicate economic balance of a community and also, the availability of other things, in this case electricity. That is because there is a ‘demand’ for the resource, but no hard conscience on the companies part for maintaining the long term support for the community. This of course does not address those who are trying to be responsible. After watching the special on how the oil and gas companies are destroying the natural infrastructure of a hundred communities in the mid-west and Texas by fracing, It seems the idea of responsible energy production is only that. Greed wins again. Good article Kent. Very thorough without you becoming an activist.

  8. Chris
    August 10th, 2013 at 09:35 | #8

    Might be better to invest in solar. Companies selling panels for the cheapest amount ($/watt) are far more likely to survive the tough competition and oversupply in the solar industry at the moment. And once most of the more expensive manufacturers go broke, then these companies will be able to raise prices (or at least not reduce prices as often). However the more expensive cells that have higher efficiencies will still have a future once economies of scale allow them to also bring the price down – but it will take some time for them – as with all new technology it starts out expensive, but then gets progressively cheaper.

  9. Chris
    August 10th, 2013 at 09:42 | #9

    To conclude it’s the manufacturers who make the low efficiency, silicon solar cells WHICH AREN’T AS CHEAP ($/watt), as the also low efficiency, silicon solar cells which are cheaper ($/watt). The ones that are NOT AS CHEAP ($/WATT) will go broke.

  10. August 25th, 2013 at 23:57 | #10

    The recent activity by companies like Bayside show once again how important the oil and gas industry is to Texas’s healthy and growing economy. Like Apache Corp breathing life into an older Texas oil field (see this post here ), this news from Bayside shows how old Texas oil wells can continue to be productive. With the energy market booming and technology improving, there are even more options available to increase the production in older, mature, and even declining, wells. Along with Bayside and Apache, Exxon and Chevron have also paid attention to more mature oil wells. It goes without saying that reworking the older wells is good stewardship of our resources, but it is also is good for these local economies—creating more stable, well-paying American jobs.

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