Last week, President Donald Trump visited Midland, Texas, a region deep in the heart of the West Texas oil patch. Ostensibly there for a fundraising event, Trump gave a speech in which he essentially claimed victory over the crash in oil prices that have throttled much of the US oil and gas industry this year.
“And now we’re back,” Trump told the audience at Double Eagle Energy, “and now we’re just going to keep expanding. … We did a great job.”
Trump cast himself in a leading role in the supposed resurgence – touting the negotiations earlier in the year between OPEC and Russia to cut production and raise prices.
As usual in his presidency when it comes to economic matters, Trump is overly optimistic. The oil and gas industry in the Permian Basin and across the US remains anything but “OK.”
Facts First: Trump’s comments about the health of the US oil sector are highly misleading. The industry remains beset by relatively low prices and weak gasoline demand due to the reduced driving people have done during the coronavirus pandemic. The pain is only just beginning to ripple through the industry in the form of bankruptcies and layoffs. The number of oil and gas rigs in operation in the US is almost four times lower than it was a year ago. The price of oil is still 30% lower than where it was in January, and domestic crude production is down by about 2 million barrels a day from its pre-Covid peak.
“The oil and gas industry is on its back,” Philip Verleger, an energy markets expert and former senior research scholar at Yale University, told CNN.
“A lot of companies have started reporting their financials, and they’re just horrible,” Verleger said, adding that “this industry is going to shrink and going to shrink dramatically unless global prices go up.”
Other experts agreed, pointing specifically to the number of drill rigs currently operating in the US.
Steven Kopits, the managing director of Princeton Energy Advisors, told CNN that he believes the number of rigs operating in the US has “bottomed.”
“So to call it back is not true but it is probably fair to characterize it as saying that the deterioration has stopped,” said Kopits. “We haven’t stopped the bleeding, we’ve stopped the decline,” Kopits said. “The bleeding continues and it will get worse and worse.”
According to a report on Friday from Baker Hughes, an oil and gas service company, there are only 251 active drill rigs operating in the US, down from 942 rigs at the same time last year.
In the Permian Basin, where Trump announced victory over the oil and gas slump, the number of active rigs is down by 71% compared to last year according to the report.
Price per barrel and bankruptcy
The price per barrel of West Texas Intermediate crude, the US benchmark, dropped from $63 in January to below zero on April 20. Since then, the number has climbed to $41, still a third lower than before the pandemic took hold in the US.
In the second quarter of this year, 18 producers filed for bankruptcy, the second-highest quarterly increase in the last five years, according to a report from Haynes and Boone, a corporate law firm that monitors bankruptcy in the industry.
Among the casualties is Chesapeake Energy, the Oklahoma-based fracking pioneering firm led for years by Aubrey McClendon.
This significant number of bankruptcies is evidence of a quickening trend seen in the industry over the past two years. In 2018, 28 producers filed for bankruptcy, and according to Haynes and Boone “[f]ollowing a steep drop in oil prices in the fourth quarter of 2018, the number of filings started trending up in 2019” to 42.
One energy economist suggested that while Trump’s claim that things are back is an exaggeration, he did say that oil prices having stabilized has calmed things recently.
“Things have definitely stabilized, things are beginning to turn around,” said Bill Gilmer the director of the Institute for Regional Forecasting at the University of Houston. Gilmer noted the stabilization of price per barrel as well as the renewed work on uncompleted wells.
“To say it’s back, yeah, that’s an exaggeration for sure,” Gilmer said. “To say it’s improving rapidly, probably not an exaggeration.”
Production and job loss
Still, whatever the future holds for the US oil industry, it’s not likely to return to its pre-pandemic fortunes, at least not anytime soon.
On June 4, S&P Global Platts reported that “38 US operators have revised 2020 capital expenditures by 36%, a reduction of $41 billion” due to the significant reduction in production among horizontal oil rigs and fracking crews.
On July 14, the US Energy Information Administration reported that “crude oil and natural gas production in April had [the] biggest monthly decreases in years” noting that “Production declines of that magnitude usually arise only in natural disasters such as hurricanes.”
Total US production of crude oil was just over 11 million barrels per day two weeks ago, down from 13 million in early March.
According to BW Research, Texas alone lost “more than 30,100 jobs or 3 percent of its energy industry employment” in March. The report notes that these are conservative estimates.
In April, the Texas oil and gas industry lost 25,800 jobs according to Bloomberg Law. In late July, experts warned that, because of the recent surge of Covid-19 cases in Texas, those job losses would continue.