Two Items of Note

the price of oil 01

If this is how you guys are going to approach the downturn, I’m outta here.

There are two pieces of news I wanted to share with the Wolf Camp faithful today.

The first is from MSNBC: Gusher of Supply Keeps Pounding Oil Prices. I know, I know, you guys are going to yell that I’m just a one trick pony… I’ve been spinning the same yarn for months.

However! I have a method to my madness (this time, at least). I think the key information is a bit buried. Look to the middle of the page, where it discusses structural demand shift taking place in the market for refined products.

Did you see it?

Oil refineries are drowning in diesel (which, again, cannot be readily stored), because there is a lack of demand from… see it now? Oil service firms! Because the exploration and production companies dropped their rig orders so precipitously, the support companies are no longer running trucks to new or existing well sites, meaning that they no longer have to buy as much diesel fuel – further meaning that there is an erosion in demand from these firms that is starting to impact the price of crude.

I’m no master of vicious cycles, but if that does not qualify I do not know what does.

The second is this article.

The City of Odessa is providing about $400,000 grant to FMC Technologies to keep it from possibly departing for greener pastures. For those who might now know – like me – FMC Technologies is a publicly traded company with a $6 billion market cap.

On the same day it was announced that Odessa was providing this handout to a private company, that very same company announced quarterly earnings of over $2.75 per share, on 1.6 billion dollars in revenue. If you can’t tell, I was breathing into a paper bag while typing this. Perhaps if there were spray paint in said bag, this decision would make more sense to me. I have a few questions.

So, instead of diversifying the economic base of the community during a downturn, we’ve doubled down and invested public money into a private oil company in return for… what?

Oh, they agreed to hire ten employees, you say?

First, those jobs are only guaranteed to pay $45,000. For those of you (again, like me) who aren’t math majors, that salary is largely covered by the very money the City is pouring into the firm.

Second, the impact would have been greater had the City hired ten workers to help clean the town for the same rate.  There would also be the positive spillover effect that the city would be a bit cleaner for the investment. (Believe me, Odessa could use some sprucing up.)

Third, the employees would have benefited from better health insurance and a defined benefit retirement.

Oh, one more thing, there is no guarantee from the company that they will not lay off these workers at some point in the near future.

The ONLY other concession the City Council received was that the company would not move away (the threat of which lacked any credible evidence), and they agreed to the annexation of the site of their new building – which local companies wanted to annex anyway.

Did I mention that, through a quirk of history, the proposed site for the new building is located in the City of Odessa but in Midland County (instead of Ector)? Because I should totally mention that.

When the company builds its new plant, Midland County stands to reap significant gains from the construction… without paying a penny into the grant – this is a classic free-rider issue and one that Midland County has enjoyed for years.

To recap: This handout is a worse deal for the residents of Odessa than the alternative, it is not as beneficial as the alternative to the proposed workers, it cuts the local county out of any tax receipts, it forces public services to provide for another business with virtually no return, and spends public money into a downturn by investing in the very industry that put us in said downturn  – all while keeping a company in place that was not going anywhere anyway.

Your tax dollars at work, people!

Liberal or conservative… this level of stupidity should make you angry.

Meanwhile, as I’ve mentioned before, La Entrada Al Pacifico plans sit in a dusty office somewhere, slowly rotting away – unused. Refer back to the first half of this article. Do you think that creating a new trucking and transportation corridor through West Texas would increase or decrease regional demand for diesel fuel? Do you think that having a transportation hub right here would increase or decrease employment demand? Would a transportation hub through the region diversify or concentrate the economy?


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2 Responses to Two Items of Note

  1. Based on knowing you for about 5 years now, I can see steam coming out of your ears more than you breathing into a paper bag.

    The oil industry looks to be experiencing the horrors of a text book deflationary spiral. Prices going down means wages going down means prices going down means wages going down means prices going down means wages going down…. aaaahhhhhhhh!

    Midland was talked about on a podcast hosted by Steohen Dubner (Freakonomics author) and James Altucher called Question of the Day. Stephen said that he recently visited Midland and spoke about how the people there were surprisingly even-keeled about the oil prices. He commented how the people in Midland are just used to the economics highs and lows. The Permian Basin would be nothing without its people.


    • Jeff Lambert says:

      Absolutely true on all counts. It’s just too bad that the people around here don’t get the government they deserve instead of a bunch of yahoos (with limited exceptions). I say (and mean) that as a nonpartisan quip. R or D, many of these people should not be in office.


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