Oil activity

While one commodity has seen prices flourish in recent months, another remains in the doldrums. And they both affect the Permian Basin.

"There’s definitely a split in oil and natural gas pricing that we haven’t seen in the past," said Kirk Edwards, president of MacLondon Royalty Co. "But it’s taking affect at this time."

For years, the lines on charts tracking prices on the two commodities stayed relatively close, with each peaking in July 2008 before plummeting with last year’s meltdown in credit markets. But, while oil has moved back up in recent months, that hasn’t happened for gas.

The rig count in West Texas is back up to around 75 to 80 percent of where it was before prices plummeted last year, Edwards said. At one point, it was only around 40 percent of its former level.

But that’s mainly due to oil, because natural gas drilling is as inactive as its been in recent years, Edwards said. And it’s not likely to pick up in the short term since new records have been set for the amount of natural gas in storage each of the last six weeks.

Natural gas prices have dropped from a high of more than $13 per million British thermal units in July 2008 to current prices under $5.

While global tensions tend to keep the price of oil up, gas is mainly in demand in the United States, Edwards said.

"There’s probably an over-supply of oil," said Edwards, former president of the Permian Basin Petroleum Association and chairman of the board for the Federal Reserve Bank of Dallas’ El Paso branch. "But oil has been such a global commodity, while natural gas is more of a domestic commodity."

Areas like Ector, Andrews, Ward, Winkler and Gaines counties produce more oil than gas, but western areas like Pecos County rely on natural gas production.

"They’ve gone from 55 rigs south of Fort Stockton a year ago to a handful now," Edwards said. "That’s devastating to their economy."

And even though more oil production occurs around Odessa, the lack of natural gas drilling affects service industries based here, Edwards said. That has likely contributed to the city’s unemployment rate climbing above 9 percent, which is among the highest in the state. Just more than a year ago, Odessa competed with Midland for the state’s lowest unemployment rate.

While people know about natural gas drilling in places like the Barnett Shale around Fort Worth and sites in Oklahoma, Edwards said people could be surprised to see the impact it has on the economy in the Permian Basin, where oil is thought of as a way of life.

"If you’re not in the oil and gas industry yourself, people don’t realize how big natural gas is, not only for West Texas, but for the state and the country as a whole," he said.

Natural gas activity is important because, with oil supply being in a steady decline, new technology has opened up doors for gas production, which had previously been difficult to discover or produce, Edwards said.

Arleene Loyd, the Odessa Chamber of Commerce’s director of business retention and expansion, said layoffs in the petroleum business are starting to level off.

"We’re seeing a pickup in oil exploration, but we have not seen much in natural gas," she said. "We all just think of oil, but natural gas is critical."

As for the future of the two commodities, economist Ray Perryman says oil prices are somewhat high because of a relatively weak dollar and supply and demand conditions. With some day-to-day fluctuations, he expects prices to stay in the $75 to $80 range for the time being.

"Given that the Federal Reserve is likely to keep interest rates low for a while, this pattern will likely persist," said Odessa resident Perryman, head of the Waco-based Perryman Group. "Energy demand will begin to pick up next year."

While keeping at the same levels is good news for oil, it’s not so good for natural gas. But because of the substantial supply currently on the market, he said it’s likely gas prices won’t change much.

"A very severe winter could bring some upward drift," he said of natural gas prices. "Most analysts and the futures markets believe prices will increase in about a year."

And once gas prices do rebound, Edwards said it would likely be a while before investors are willing to give the go-ahead on new drilling projects.

"It won’t rebound until we get a more solid price for quite a few months," he said. "People aren’t going to go out and drill a new well just because we have short-term prices looking good. It has to look like it will stay high for a while."