The article this post is about appeared in Fortune magazine. The title is "Lone Star Rising." It is about the re surging oil industry in my home region of Midland, Texas and the Permian Basin. This comeback is due in large part to new technology that allows the extraction of oil in a cost effective way. The impact starts at the local level and continues through to an international level.
I am reminded of a parallel I recently read. Back in the 70s I recall reading that the world would run out of food to accommodate future population growth. If you looked at the current food production back then and imposed a graph of world population growth on top of it, you might come to the same conclusion. What was not included in any analysis and likely could not be factored in was technology improvements and innovation in food production and preservation. But that is what we saw, substantial increases in food production using technology and innovation in grains, equipment, fertilizer, etc. resulting in a higher yield per acre. Yes, it has positive and negative impacts. Examples are the cost of equipment increased, the optimal size of a farm in terms of acreage went up too. This was a factor in the purchasing of family farms by corporations and partnerships.
Another example is rubber. In World War II one product highly valued was rubber. It was an important natural resource. Before World War II, rubber was largely controlled by the Axis powers. During the first part of World War II rubber drives in the U.S. were very popular and very necessary. However, in 1940 a scientist with B.F. Goodrich invented a synthetic rubber. This helped the U.S. manufacture rubber for all the products needed to fight a war. Think jeep and other vehicle tires for one. After the war, the U.S. catapulted in the production of rubber and impacted the world rubber trade and sourcing of the raw material. Consider the cities built on rubber and tire production and jobs created in this industry. An example of a city is Akron. And an industry that experienced phenomenal churn and growth based in part on these and future innovations include these U.S. based companies - B.F. Goodrich, Goodyear, General Tire, and Uniroyal.
In almost every industry you can name, straight line graphs of production and population growth can indeed imply severe shortages in the future. However, we cannot easily predict the impact of technology and innovation in increasing the volume of products. I realize this is somewhat simplistic, but one I think rings true in a broad sense. We seem to consistently underestimate corporate R&D to solve so many of the challenges we face.
A bit of history of the oil industry in West Texas. When I lived in Midland, we read that the world is running out of oil that we can feasibly drill. And we were importing well over 50 percent of the oil consumed in the U.S. on a daily basis. That was a couple of decades ago. In addition, when I was growing up in Midland I learned about the oil industry and the factors that positively and negatively impact the business. Perhaps among the most important, the price of a barrel of oil in large part determines where and how you extract oil from the earth. To put it another way, the cost of getting one barrel of oil out the earth is directly related to the price of a barrel of oil on the market. Oil that can be pulled from the earth in a cost effective means is called recoverable.
Today. The U.S., led by the Permian Basin, produces more oil than anyone thought possible. The U.S. exports oil. Very few people ever thought that was possible. According to the article, over 30 billion (yes billion) barrels of oil have been drilled from the Permian Basin since 1923. How much left in the ground is recoverable (it can be extracted in a cost efficient means)? Estimates are between 60 to 90 billion (yes, again billion) barrels.
The Permian Basin has substantial oil reserves, but until recently it was not cost effective to extract the oil. Two innovations changed that. The first one was horizontal drilling. The second one is fracking. As a result, production in the U.S. climbed and in the Permian Basin surged. The article does on excellent job showing the growth of drilling.
The article points out the positive and negative impacts of these innovations. As you experience growth, sometimes demands in construction outstrips infrastructure development. By infrastructure I mean roads, schools, housing, etc. West Texas, parts of North Dakota and other states witnessed this. Costs increase (wait till you read about hotel rooms). You may see an increase in new business formation with may not directly related to the oil business and see far more disposal income from residents.
As I read the article I took great pride in my hometown and the region. These are good people, hearty people. Midland is a wonderful city to raise a family. It offers so much. The entrepreneurial spirit is alive and well. Advances in drilling technology breathed new life into the area.
In economic development we constantly read about cities and regions struggling with declining employment, loss of jobs, and aging population. Or cities that are highly dependent on one industry. Midland and the Permian Basin is an excellent example of how this can be changed. However, I do note that it is driven by technology and innovation applied to a natural resource. Frankly, I think this is not easily replicated. Other struggling locations may not be as fortunate to have a natural resource vital to U.S. interests. Even with this, a good goal for every economic developer should be to diversify the economy.
I tried to offer a few of the high points of the article. It is long, but definitely worth the read. The graphics and pics are outstanding. I can remember when Midland experienced decline in jobs and negative population growth. Major oil companies cut back on local employees or simply shut down all operations in the city. Now, it is coming back. Unlike previous surges, this one maybe more long term. Note the commitment of Exxon Mobil and Royal Dutch Shell. I hope it is.
Link to the article: http://fortune.com/longform/permian-basin-oil-fortune-500/
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