What a difference a few years make in the Texas oil patch.
Oil and gas production continues to grow, the sector is creating new jobs at a rapid rate, and most companies are investing more.
In a December survey by the Federal Reserve Bank of Dallas, nearly two-thirds of oil and gas executives reported an increase in capital spending compared to a year earlier — and nearly two-thirds expect spending to increase in 2023.
“Whether we like it or not, oil and gas is going to be here for a very long time,” the head of an exploration and production company told the Dallas Fed. “Our demand is simple: get out of our way and we’ll deliver cheap energy.”
In the 12 months ending in October, crude oil production rose 7% in the US, reaching 12.38 million barrels per day. Texas daily production reached nearly 5.2 million barrels in October, an increase of 4.6%.
These amounts are just shy of the record set at the end of 2019, shortly before the pandemic arrived. But in 2023, US production is forecast to rise to set a new high, driven by the Permian Basin region in West Texas. The Permian is expected to increase production by 440,000 barrels per day, according to the US Energy Information Administration.
Natural gas withdrawals are already at a record high, led by a 5.1% increase in Texas for the year ended October.
The energy agency cited a survey by the Dallas Fed, noting that the responses pointed to increased activity, especially with most companies planning to increase capital spending this year.
According to the survey, optimism weakened in the fourth quarter due to concerns about inflation, supply bottlenecks and the availability of capital and labor. The threat of a recession could dampen some enthusiasm, said Michelle Michot Foss, a fellow in energy, minerals and materials at Rice University’s Baker Institute.
“But the math is too convincing,” Michot Foss wrote in an email. “The writing is on the wall. Demand is not going away (except for the effects of recession).”
Job growth is one indicator of a strong recovery in the Texas oil patch. The number of employees working in oil and gas extraction and related activities increased by almost 22%, to almost 210,000, in the 12 months ending in November. That growth rate was about four times faster than the 5.1% increase in all nonfarm jobs in Texas, according to estimates from the U.S. Bureau of Labor Statistics.
The unemployment rate in Midland, a key hub for the Permian, was 2.8% in November, among the lowest in the nation. Nationwide, the unemployment rate for workers in the oil and gas sector was just 1.9% in December.
“There is a lot of demand, but the employees are gone,” said Kunal Patel, senior business economist at the Dallas Fed.
The survey indicated strong growth in employment, hours worked and wages in the fourth quarter. But a history of boom-and-bust cycles, which included major layoffs in 2009, 2015 and 2020, makes recruiting and retention difficult.
“It’s just that most people are looking for a career,” Patel said.
How tight is the labor market? “Our company relies more on rotating employees to service equipment,” said one Permian operator.
With local infrastructure stretched to the max, “We are seeing an increase in safety incidents due to poor road conditions and traffic,” the CEO said.
The oil and gas industry often complains about government regulation and opposition to fossil fuels. But even if all regulations were removed, activity could not increase by more than 10% due to a lack of workers, the CEO said: “Automation cannot drill wells, move wells and build sites.”
Despite labor concerns, it is not the primary impediment to growth. This relates to cost inflation and supply bottlenecks, which 32% of exploration and production companies asked as the biggest drag on increasing production.
Only 8% chose labor as the biggest obstacle to increasing oil and gas production.
“Inflation remains a major issue in research and production,” the Dallas Fed chief said. “We are bracing for further cost increases in 2023. This is against a backdrop of commodity price uncertainty and fears of demand destruction due to recession.”
Inflation is the main contributor to this year’s higher capital spending plans, Patel said. Add in the threat of a recession and ongoing supply problems, and that heightens uncertainty, which dampens optimism.
In the survey, roughly half of the executives reported an increase in uncertainty compared to the previous quarter – and a year earlier.
“They’re not as optimistic as they might be,” Patel said. “From a high level, activity continues to rise and they will spend more. But some of it [spending] will be eaten up by cost inflation.”
Both natural gas and crude oil prices have been volatile over the past year, in part due to Russia’s invasion of Ukraine and the sanctions that followed. Crude oil was selling for around $80 a barrel in early 2022, rose to more than $120 in early summer and retreated back to $70.
When asked what price they used to plan their capital spending in 2023, the median answer was $75 a barrel, the Dallas Fed said.
Rice’s Michot Foss said she is optimistic about attracting more investment to the fossil fuel industry, both in the short and long term. One reason is that there are not enough materials to build energy substitutes on a large scale.
“Regardless of all the pressure to portray the oil and gas business as riding off into the sunset,” she said, “the fact is that replacing this commodity is going to be extremely painful.”