Drop in energy prices lowers the boom in Texas oil patch

Falling oil prices halted a 30-month growth spurt in Texas’ oil and gas industry boom in June, a new industry report shows.

The Texas Petro Index, which has measured job numbers, rig activity, production totals, wells completed and other related figures across nearly two decades, dropped for the first time since a rush to draw oil from shale caused a surge of drilling in Texas.

The index fell to 270.4 in June from its recent peak in May of 271.5, which was the highest since rapid industry growth pushed it to a record 287.8 in October 2008.

A trend of declining oil prices added to already low natural gas prices to push the Petro Index down, said Karr Ingham, an economist for the Texas Alliance of Energy Producers, which released the study Tuesday.

He said the number of active oil and gas rigs in Texas has fallen further in recent weeks to 900, the lowest level since September 2011, as companies have reassessed expensive operations that are no longer yielding high returns.

Not coincidentally, he said, oil prices have fallen from near $100 in early 2012 to about $79.08 in June. Benchmark crude lost $1.72 Tuesday to end the day at $88.06 per barrel.

Companies may have grown more cautious about aggressive drilling operations, but the leveling off doesn’t necessarily mean a bust is on the horizon, said Michelle Michot Foss, chief energy economist for the University of Texas Center for Energy Economics.

“They’re trying to get a feel for what the price trajectory could be and it’s affecting decisions,” Foss said. But, she added, “I think you would need a much, much more substantial fall in prices to see a really serious drop in activity.”

Contraction ahead?

Texas employment in the fossil-fuel exploration and production industry hit a record of 251,600 in June, Ingham said. But he noted some indicators that point to possible contraction ahead. Texas crude oil production is at its highest level since 1999, but the weakening world economy is pushing demand down, he said.

That has left resource prices languishing.

The recent 30-month rise in the Texas Petro Index was almost exclusively fueled by oil drilling because low prices have curtailed natural gas production relative to its levels in previous expansions.

The monthly average value of Texas oil and gas production exceeded $9 billion in 2008 but has been around $6 billion during the most recent peak in the index, Ingham said.

During the current shale-driven boom, however, employment has soared well above levels in October 2008, he said.

If declining prices bring about a further reduction in drilling activity, Ingham said, “employment will ultimately be affected and there’s of course no way it could not be.”

European crisis

Turmoil in Europe and a weakening domestic economy have also affected the industry by depressing oil prices, Ingham said.

“All of these terrible things happened in the second quarter and sort of threw a little bit of rain into our parade,” he said.

But Texas oil prices and drilling activity may not be as influenced by broad economic trends as they may have been by recent pipeline developments, said Ed Hirs, a professor of energy economics at the University of Houston.

A recent increase of pipeline capacity bringing oil to the U.S. Gulf Coast may also be pushing prices down, he said.

“Right now you’ve got more domestic supply coming online than the country is accustomed to handling,” Hirs said.

The alliance’s index dates to 1995, when the index was set at a base level of 100.