A Texas Take: Oil Is Back, and the Future Looks Bright; Now as for That Transition …

Those who work for the many small businesses in the oil patch see the business, and its future, differently from the energy and financial giants that get most of the coverage.

Texas oil barrels isolated on white background
Credit: Welcome Inside/Getty Images/iStockphoto.

It appears there was nothing wrong with the Texas oil business that couldn’t be fixed by oil prices on the high side of $60/bbl.

A year after the crash that briefly drove oil prices into negative territory, a survey by the Federal Reserve Bank of Dallas shows business leaders in the Permian and other plays in and around Texas are way more optimistic than they were a year ago.

While spending remains cautious, things could get more bullish in the future if the Fed survey analysis is right in its prediction that demand will grow faster than supplies over the 2–4 years, which 76% of those who responded to the Fed survey expect will be the case.

That sort of supply imbalance is the stuff that leads to talk of $100/bbl oil returning.

And the survey suggests that many do not see consumers buying into a transition away from vehicles powered by gasoline or electricity generated from natural gas.

The mood is positive for the second quarter in a row, with 72% of the oil and service company leaders surveyed saying they are optimistic about their prospects in the mostly Texas Federal Reserve district that includes parts of New Mexico and northern Louisiana.

But their companies are generally sticking to tight budgets adopted last year when the outlook was dire. Capital spending is up for 52% of the E&P companies surveyed, but spending on staff remains tight, with more than 75% of them saying they are not adding to their staff or seeing an increase in overtime work or pay.

Things are looking brighter for service companies, with 73% saying their company’s outlook is improving. Considering how hard they were hit last year, it is not surprising that things are looking up.

Job seekers might get a better response from service companies than from exploration and production (E&P) companies. While the majority of the firms surveyed are not adding staff, 35% of the service firms say they are hiring—more than double the rate for those in E&P—and 50% say their overtime is up, which is often an early indication they will need to add workers.

Looking ahead, they see oil moving into an up cycle with demand rising and supplies tight, which could set the stage for the next big up cycle for oil.

The notion of a rapid energy transition to other sources of energy looks unlikely. One anonymous comment said the emission-reduction targets set by the federal government are “completely unrealistic,” adding, “There will be more internal combustion engine vehicles on the road in 2030 than there are now. There is no way we can hit the 2030 target. The US public will reject the Green New Deal as soon as they understand the personal impact to them in transportation, home utilities, cost inflation, etc.”

The many small companies in the survey also have a really different point of view than major international firms such as Equinor and ExxonMobil because most of those surveyed own or work for privately owned small businesses.

About 80% of those surveyed work for companies employing fewer than 100 people, and half of those are in companies with fewer than 10 workers, which is nearly as high as the numbers in Texas. At the other extreme, only about 5% work for operating or service companies with 1,000 or more workers.

Companies of the future are not likely to sound anything like the offshore-focused carbon-reducing business future that Equinor laid out for its investors at its Capital Markets Day.

“The difference between Equinor’s approach could be due to two factors: location and/or size. With regards to size, I can tell you there is a dichotomy between what we see with the smaller firms and the larger firms,” said Michael Plante, senior research economist for the Dallas Fed.

For small companies, their money and people are fully committed to finding and producing oil and gas. Their resources for addressing problems are limited, and “they are likely to receive less pressure than companies such as ExxonMobil” to focus on projects to reduce greenhouse-gas emissions, Plante said.

A Fed survey of small firms about reducing greenhouse-gas emissions showed they are “much less likely to have put plans in place and, when they do, they are likely to be less ambitious,” he said.

When asked in this survey if they had made an investment in renewables or were considering it, 83% said no. Among the others, 7% of the companies are spending on renewables and 9% are thinking about doing so.

The notion of a carbon tax on emissions also was a nonstarter, with 82% opposed to the measure designed to put a cost on carbon-dioxide emissions to encourage spending to reduce problems such as methane leaks.

“Carbon taxes, tax credits, and the like are just taxes. It’s politics and does nothing except to give the politicians more power,” said one respondent.

Another commenter predicted trouble in the renewable electric business based on the factors that lead to the boom/bust cycles experienced in the oil business.

“Investors want to say they are contrarian, but they follow the herd. The amount of money being thrown at renewables will crater the price of another commodity,” said one, who added that prices will be driven down by excess capacity on developments by developers, who the commenter said are motivated by the tax credits they can earn for renewable investments.

When the survey asked those in the oil business what sort of incentive might convince them to focus on carbon-emission reductions, 50% answered tax credits, followed buy 17% who said a combination of credits and a carbon tax could do so.