The recent steady drop in crude oil prices might be the first sign of the end of New Mexico’s seven-year oil boom, meaning New Mexico’s economy could soon face challenges.
One of the most prolific oil and gas regions in the United States, the Permian Basin is also one of the largest. It stretches about 250 miles wide and 300 miles long across much of Southeast New Mexico and West Texas.
According to a 2014 report, “The Economic Impact of the Permian Basin’s Oil and Gas Industry,” the Permian Basin’s oil and gas industry sustained more than 546,000 jobs and generated about $137.8 billion in economic output in 2013.
That sunny outlook might be taking a darker turn. A global oversupply in oil has driven prices to $42.50 per barrel as of Friday. This is down from June 2014’s high of more than $100 a barrel.
Driving the reduction in the price of crude are a lower demand as the summer season comes to an end, production issues, the Chinese economy and the impending Iran nuclear deal.
Wally Drangmeister, vice president and director of communications for the New Mexico Oil and Gas Association, said when oil prices sank below $70 per barrel last spring, it was then-uncharted territory for oil producers.
He also said there is no set break-even point, and each company in the industry is different.
“It’s no question that the price of oil is a concern to oil- and gas-producing companies in New Mexico,” Drangmeister said in reply to oil’s recent price decline.
Despite the decrease in oil prices and the number of overall rigs in New Mexico, which is down from 94 in August 2014 to 54 this year, overall oil production in New Mexico is at its highest, Drangmeister said.
Raye Miller, with Regeneration Energy Corp. in Artesia, said he knows Concho Resources Inc. has increased its production despite having fewer rigs.
Concho, one of the most active companies in the Permian Basin, produced about 50,000 barrels of oil in June 2014. In June 2015, it produced about 70,000 barrels with fewer active rigs.
“Concho is not running as many rigs in New Mexico as they were, but the success of previously drilled wells has increased their production,” Miller said.
Drangmeister and Miller both said despite the decrease in rigs in New Mexico, the state and the Permian Basin in particular are on path to have one of the highest production years yet.
Despite the high production numbers New Mexico might see in 2015, if the price of oil continues to fall, then industry cutbacks will be seen across the state, Drangmeister predicted.
“There will be less employment and economic activity in these areas if companies cut back the number of rigs being drilled,” Drangmeister said.
If the number of rigs are cut back, those jobs disappear.
Even though many oil and gas officials are self-assured about the future, potential layoffs across the industry are inevitable.
Joe Leyva, who worked as natural gas seller for Yates Petroleum Corp. in Artesia, said he was out of work for more than four months.
“It’s bad business and it wasn’t a good deal at all,” Leyva said. “Luckily, I did find something.”
No large scale layoffs have occurred yet, but after crude prices fell below $70 per barrel Miller said that many companies would have to look at their costs moving forward.
This includes cutting production costs by reducing the workforce.
“I hope the market will rebound, even though it won’t do any good for the people who’ve been laid off. It’s just no good,” Leyva said.
Once rig count is decreased and the production of oil starts to slow, or once the supply on the market becomes so large that the price of oil falls even further, then the amount of money the state makes through taxes also diminishes.
“That is the million-dollar question and it is very, very difficult to predict what could happen next,” Drangmeister said.
If oil prices continue their downward descent, the long-term effects on the state of New Mexico could be staggering, both in terms of job and revenue loss.
According to “The Economic Impact of the Permian Basin’s Oil and Gas Industry” report, in 2013 the oil and gas industry produced more than 94,000 jobs in New Mexico. More than 53,000 jobs were directly related to the industry, while more than 20,000 jobs were indirectly created and induced.
On average, one rig can employ anywhere from 50 to 70 people with high-paying salaries, which are the direct effects of the oil and gas industry.
Indirectly, the drilling of that rig will produce growth in other industries. Eddy County has welcomed Rangeland Energy, a frac sand provider, the construction of over five major hotels, and the prospect of more than a dozen new restaurant and retail shops in the past year.
The population growth from the influx of oil and gas workers also has prompted the city of Carlsbad to construct new schools to support the increase in student enrollment.
In Eddy County, which according to the Carlsbad Department of Development leads the Permian Basin in oil and natural gas production for the third year in a row, more than 31,000 jobs were created through the oil and gas industry in 2013.
John Waters, executive director for the CDOD, said the study used data collected from the New Mexico Oil and Conservation Division and the Texas Railroad Commission for the study.
Waters, however, was optimistic about Eddy County’s future despite the recent decline in oil prices.
“In 2009, it (oil prices) went down into the $30s, but it rebounded,” Waters said. “Most people in the industry understand it is a commodity and that it goes up and goes down.”
Waters said that, unlike some Texas counties in the Permian Basin, Eddy County is fortunate because of its diversity.
“We are not just entirely oil-based here, such as Midland or Odessa. The diverse work industries we have here is why we are able to survive.”
The diversity that Waters referred to in Eddy County includes the potash industry, construction, agriculture and the Waste Isolation Pilot Plant.
He said that if the oil industry were be hit hard, and if people were to be laid off across the board, they would have options.
“If you have a family here, you are probably going to stay, because moving is expensive,” Waters said, adding that it is unlikely for a worker who has kids going to school in the local community and who has bought a house to pick up and move if they are laid off from the oil industry.
Rather, any workers who find themselves in such a situation would transition and find work in another field, such as potash or at WIPP.
But the New Mexico Workforce Connections July 2015 Labor Market Review lists Eddy County as one of the least diverse economies in the state with mining, quarrying, and oil and gas extraction accounting for around 30 percent of total employment.
State, local impact
Concerns about the direct impact of cuts made in the oil workforce has state and local governments closely watching the decline of oil prices.
About one-third of the state revenue is attributed to oil and gas production.
According to the New Mexico Oil and Gas Association, oil and gas revenue to the state was $3.8 billion in 2013. The majority of that revenue is coming from Southeast New Mexico.
About $1.7 billion of that revenue goes into the New Mexico General Fund.
Regeneration Energy Corp.’s President Raye Miller said every dollar oil prices drop equals a $6 million reduction or loss of revenue for New Mexico.
“With rig counts, dropping prices, I expect locally we will find gross receipts tax revenue decline more this year over last year,” Miller said.
In April, the Eddy County Commission was forced to make cuts in all departments to help make up for a projected decrease in oil and gas revenue.
There is, though, some good news for consumers with the decline of oil. Since oil prices are a good indicator of where gasoline prices will be, many think that after Labor Day gasoline prices could decrease from 20 cents to 30 cents a gallon.
Average prices for unleaded gasoline were at $2.65 per gallon nationally and $2.67 in New Mexico, according to AAA.
This article was written by Sarah Matott from Carlsbad Current-Argus, N.M. and was legally licensed through the NewsCred publisher network.