From the windswept prairies of western North Dakota to the picket-fence lined suburbs of Houston, America’s oil patch is coming down from an unexpected, frenzied and ridiculously lucrative high: The boom is over. For many people, cheap oil translates into much-needed savings at the pump. But for pockets of the country whose fortunes are closely tied to extraction, the effects of the ongoing price plunge are more painful than anything else.
Benchmark oil prices fell below $30 a barrel Friday, down from above $100 just two years ago. So far, that decline has wrought thousands of layoffs and foreclosures — and threatens to do even more damage over the next year.
“It’s very much a regional effect,” said Robert Gilmer, director of the Institute for Regional Forecasting at the University of Houston’s Bauer College of Business. “It primarily hits places like Texas and North Dakota.”
That’s because the oil drilled in shale formations like North Dakota’s Bakken or Texas’ Eagle Ford is relatively expensive. As prices have dropped, producers in the shale fields have found it harder to compete against cheaper oil imported from countries like Saudi Arabia or Iraq. “To keep shale busy and active and growing, you need to have $65 a barrel,” said Gilmer. “That $65 looks way out of reach now.”
Friday's oil price drop led to a dismal market day on Wall Street, as stocks plunged amid concerns about declining crude prices and fears about China's economy. A broad market sell-off saw shares of energy companies drop, including Marathon Oil, which saw its share price drop 10 percent and Anadarko Petroleum, which saw its shares slide 8.5 percent. Shares of Chesapeake Energy Corp. fell 4 percent.
Oil companies have responded to the declining price of crude by cutting capital expenditures and laying off workers. Nationwide, employment in the oil and gas extraction sector fell to 184,500 last month, with employers shedding 17,000 jobs since an October 2014 peak, according to the U.S. Bureau of Labor Statistics. In North Dakota, the active rig count has fallen from 200 to 49 over the past four years. In Texas, the oil rig count is 271, down from 697 at the same point last year.
Each of those rigs can support hundreds of jobs, from hard-hat wearing roughnecks and collared petroleum engineers to cashiers at nearby convenience stores and fast-food joints. A recent International Monetary Fund working paper estimated each U.S. drilling rig translates into 224 jobs. By that count, the ongoing decline in oil prices has cost the United States nearly a quarter million jobs, putting a damper on what’s otherwise been a solid stretch of job growth.
On Tuesday, the Federal Reserve warned Texas could lose jobs for the first time in seven years if crude oil prices do not rebound.
Over the past year in North Dakota, where thousands have flocked to get their hands on a piece of the oil boom, overall employment has declined by 13,500 — the highest such swing in the nation. In a sign of the times, the state’s public universities recently launched a scholarship program to attract laid-off oilfield workers, “Bakken U.”
The woes have spilled over into real estate markets, too.
“We’re definitely starting to see weakness in the markets that are more dependent on the oil industry,” said Daren Blomquist, vice president at RealtyTrac, which provides housing data to the real estate and financial services industries.
The number of U.S. properties with foreclosure filings hit a nine-year low last year, RealtyTrac reported this week, down 3 percent from 2014. But a few of the heaviest oil producing states saw an emphatically different trend: Foreclosures were up 15.7 percent in Texas, including even higher rates in oil-rich areas like Midland, 36 percent in Oklahoma and 387 percent in North Dakota. (The latter, however, still has the lowest rate in the nation.)
Key indicators do not suggest the boom is about to spring back to life anytime soon. Crude oil futures are trading at $40 a barrel for June 2017, but the price of oil remains famously difficult to predict. Earlier this week, the U.S. Energy Information Administration projected that crude oil prices will remain “relatively low through 2016 and 2017,” climbing toward $50 a barrel sometime next year.
Michael Webber, deputy director of the Energy Institute at the University of Texas, Austin says today’s slump more closely reminds him of the prolonged oil bust of 1986 than the relatively brief slides of 1998 and 2008. Among other factors, oil exports from Iran are expected to grow, he points out, thanks to the recently-approved deal that lifts sanctions.
Gilmer says the drop in prices initially seemed tied to supply-side factors like booming production in the United States and Saudi Arabia. But with sagging demand in Europe and China, the rut seems more serious than it did at first.
“Globally, demand has really has shrunk,” he said. “That makes this harder and longer to get out of.”