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HoustonBusiness A Perspective on the Houston Economy FEDERAL RESERVE BANK OF DALLAS • HOUSTON BRANCH • SEPTEMBER 2003 Is There Life After Oil in Midland and Odessa? The Odessa–Midland economy remains very much in the grip of oil. However, it is apparent that the oil funds have been invested wisely in education, infrastructure and housing and that efforts are ongoing to improve the business climate through better roads, rail connections and industrial diversification. T he Odessa – Midland metropolitan statistical area (MSA) consists of Ector and Midland counties, with a population of 237,068 divided almost equally between the two (see Table 1). The cities of Midland (population 94,996) and Odessa (90,943) are located only nine miles apart, and together they dominate their part of the West Texas economy. The two cities share a common location, have a similar history and respond to the same broad economic forces. Because these two cities are located in the heart of the Permian Basin, oil has been their most important economic force for 80 years, and — like Houston during this same period — Midland and Odessa have repeatedly ridden the boom and bust cycles of the oil and natural gas industry. This article examines these two important oil cities: their past, their recent economic performance and their prospects for continued growth as the Permian Basin oil and natural gas fields decline. Their strong dependence on oil also provides insight into how current expansion in the oil sector affects the Houston economy. Common Past Midland and Odessa began as neighbor cities of the same age and remarkably similar economic histories.1 Both were products of the entry of the Texas and Pacific Railway into West Texas in 1881. Midland was originally named Midway by the railroad for its location halfway between Fort Worth and El Paso. But because other Texas locations were already called Midway, the name was changed to Midland in 1884 to secure a local post office. Railroad workers named Odessa for its resemblance to their native Odessa, Russia. Land companies based in Ohio in the 1880s were separately organized to attract settlers to each city. To promote a denser population along its route, the Texas and Pacific Railway offered free freight for farm equipment and household goods to those willing to relocate. West Texas proved to be better suited to raising cattle and sheep than Table 1 Ector and Midland Counties Compared discoveries in 1926 — the Yates field in Pecos County and the Hendricks field in Population 120,926 116,142 21,370,983 Per capita income $22,671 $33,384 $28,472 Winkler County. Employment 58,845 61,395 10,331,605 Oil was first found in Unemployment rate 8.1% 5.1% 7.5% Ector County on the W. E. African American 4.6% 7.0% 11.5% Connell ranch in 1926. A Hispanic 42.4% 29.0% 32.0% boom followed in 1929 – 30 Other white 51.3% 62.1% 52.4% with the discovery of the SOURCES: Population and per capita income (2001), Bureau of Economic Analysis; employment and unemployment rate (June 2003), Penn and Cowden fields. In Bureau of Labor Statistics; African American, Hispanic and 1925, prior to the discovery Other white population (2000), Census Bureau. of oil, Odessa’s population to farming, however, and by was 750, but by 1929 it had 1910 Ector County was home to swelled to over 5,000. Although 84 farms and ranches and 24,000 Midland County would not see cattle, while Midland County major oil discoveries until the held 178 farms and ranches and 1950s, it grew as oil developed 29,000 cattle. The area became in surrounding counties. San one of the most important catAngelo had been the city clostle-shipping points in Texas, est to the initial discovery of well known for the high quality oil in Mitchell County, but as of its Hereford cattle. In 1910, later discoveries moved west, the combined population of the so did the logical center of oiltwo counties — measured in field supply and management. people — was still only 4,645. Midland and Odessa divided Farming was generally more the oil-related work between successful in Midland County them in a way that shaped the than in Ector, further to the west. character of the two cities for Irrigation arrived in 1911 and decades to come. gradually provided some relief Odessa became the logistifrom periodic droughts. Corn, cal center for providing labor, sorghum and especially cotton oil services, supplies and spread rapidly. By 1920, Midequipment to the oil fields. Its land County boasted 4,600 acres western location on the Texas of cotton, while only 363 acres and Pacific provided an initial were planted in Ector. geographic advantage over Then oil changed everything. Midland, and Ector County Oil was first discovered in the commissioners furthered matPermian Basin in Mitchell ters with a program to build County, near Westbrook, in roads from Odessa into the oil June 1920. By the end of 1922, fields. Midland became the modest but commercially viable headquarters city for oil comamounts of oil were being shippanies operating in the region. ped out of the region on the A large modern office building Texas and Pacific Railway to a (the Petroleum Building) and refinery in El Paso. Geologists an up-to-date, 150-room hotel continued to doubt the poten(the Scharbauer) seemed to be tial of the Permian Basin region the initial catalyst for this growth. until May 1923, when Santa Rita By 1929, 36 oil companies had 1 gushed oil near Big Lake, and offices in Midland. a series of subsequent wells The division of labor has proved that the area contained continued to this day. The Perthe first major field in the Permian Basin still pumps more mian Basin. Later discoveries than 1 million barrels of oil per were mostly to the west, in day, or 68 percent of Texas’ Crane, Upton, Ward and Ector production. It produces 4 bilcounties, including two major lion cubic feet of gas per day Ector Midland Texas 2 and regularly accounts for 8 to 10 percent of U.S. drilling activity.2 Midland made the decisions that shaped the Permian Basin fields, and Odessa carried them out. The split between the cities is white-collar/ blue-collar, brains versus muscle, and over the years it bred a fierce civic rivalry. The cities have battled over naming the airport (it is the Midland Airport), the location of the fouryear university (now in Odessa), hospital funding, wastewater discharge and many other issues. But in recent years a new spirit of civic cooperation has broken out, and we will see below some of the economic logic upon which this cooperation is based. Current Developments in the Oil Fields The current expansion under way in the U.S. oil sector is the third since 1997. Deep declines in oil-field activity came in 1998– 99 after the Asian financial crisis and again in 2001 – 02 on the heels of the U.S. recession. The Permian Basin has generally followed the pattern set by the U.S. rig count (Figure 1) but has been somewhat more volatile, with higher peaks and deeper valleys. Natural gas has become the primary driver of drilling activity in both the United States and the Permian Basin, with 85 percent of nationwide drilling in recent years devoted to natural gas. Figure 2 shows the number of workover rigs operating in West Texas at the peak and trough of recent oil cycles. Workover activity, one measure of the maintenance being done on these 80-year-old fields, relates more closely to the price of oil than natural gas. The latest expansion in the oil fields has been more moderate than might have been expected, especially with the price of oil over $30 per barrel for most of this year and natural Figure 1 Number of Working Rigs in United States and Permian Basin trend toward more panies into super-majors and a natural gas production continuous grading and weed1.6 and less oil reduces ing out of less profitable propPermian Basin rig count 1.4 the need for service erties in their portfolio, these and maintenance work. companies have all either left 1.2 Gas wells are less comthe region or greatly reduced 1 plicated and require their presence. Oil and natural .8 less ongoing attention, gas are still being produced, for example, than the but today the company names .6 U.S. rig count pumps that bring oil have changed to independent .4 to the surface. producers such as Apache Corp., .2 Finally, the PermiAnadarko Petroleum Corp., Occian Basin is a declining dental Petroleum Corp., Pioneer 0 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 field, and that means Natural Resources Co. and Pure SOURCE: Baker Hughes, Inc. The Permian Basin is defined as Texas Railroad progressively higher Resources. Districts 8, 8a and 7c. costs per barrel of prodOver the past 80 years, uction over time. The major Odessa has traditionally taken gas near $5 per thousand cubic companies, and increasingly the brunt of the ups and downs feet. The rationale for the oil the large independents, find of oil-field activity, while Midindustry’s tempered response to themselves dissatisfied with the land’s white-collar workforce rethese price incentives is not return on these properties, and mained stable. In recent years, entirely clear, but several reasons sales of these properties have however, the exodus of major can be offered. become common. Looking becompanies and the reduction First, this is the third cycle yond the Permian Basin and of technical and administrative since 1997. The ups and downs comparing the behavior of U.S. work done locally have put unof the oil industry have come drilling with the better-performrelenting downward pressure so fast it would be difficult to ing international rig count, it is on Midland’s oil-related employforget the serious lessons learned clear that U.S. properties in genment. The pressure has continfrom past downturns. Because eral are drawing less and less inued into 2003 with recent anboth recent declines were closely terest from many oil companies. nouncements of headquarters associated with economic In response to the rig count, cuts by Anadarko and Oxy Perevents — the Asian crisis and oil-related employment in the mian. the 2001 U.S. recession — the Odessa–Midland MSA has inIn the current round, oilindustry has waited for clear creased from 10,300 jobs in April driven expansion has come signals that the U.S. economy 2002 to 11,200 at present, an largely in Odessa, with additionwill strengthen and not fall into 8.7 percent increase. Total emal work being mostly added in a double-dip recession. ployment has risen only 0.6 perthe fields. But the rapid shifts Second, the fall of Enron cent over the same period. The from boom to bust have taken and subsequent accounting and oil-related job response has been a toll even there because workfinancial scandals put every mild partly because of the weak ers have left the area or have corporate balance sheet under overall oil-field response, but been increasingly difficult to close scrutiny, but companies also because of the in Houston or the energy busisale of producing prop- Figure 2 ness were more scrutinized Peaks and Troughs in Workover Rigs Operating in West Texas erties by major compathan most. The stock market Working rigs nies and the consolida- 600 has not rewarded oil and natution of administrative ral gas producers for current and technical work into 500 high commodity prices, leaving Houston. them in a defensive position A decade ago, the financially. Continued low 400 stellar list of oil compastock prices maintain the pres300 nies operating in the sure on companies to fund Permian Basin included pension plans and generally to 200 such major firms as keep the balance sheet strong, Arco, Chevron, Exxon, all of which detracts from new 100 Mobil, Phillips and capital spending programs. Shell. Through combiThird, for the Permian Basin 0 Jan. ’88 Feb. ’89 Nov. ’90 Aug. ’92 Feb. ’98 Mar. ’99 Jul. ’01 Nov. ’02 Jul. ’03 nations of these comwith its aging oil fields, the Index, January 1990 = 1 SOURCE: Baker Hughes, Inc. 3 Figure 3 Total Employment in Houston and Odessa–Midland, 1990 to Present among these cities, mary and secondary education consistently at 18 peris strong in both cities, as are Employment Rig count Index, January 1990 = 100 Index, January 1990 = 100 cent or higher; only the local community colleges, 150 140 Houma – Thibodeaux at least partly a product of past 130 comes close, in 1969 – civic rivalry. The University of 140 79. Further, Odessa – Texas of the Permian Basin ar120 Houston Midland has held this rived in 1973, originally as a 110 130 share consistently two-year institution to comple100 through the 31-year ment the community colleges. 120 90 period, again unIt has been a four-year school 80 matched by any other for over a decade. 110 70 city except Houston, Important in West Texas, 60 Rig count 100 where the share has both cities have secured a longOdessa–Midland 50 actually increased term water supply. The cost of 90 40 slightly. Houston has living in both cities is 90 percent ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 been able to capitalize or less of the national average.4 SOURCES: Bureau of Labor Statistics; Baker Hughes, Inc. on consolidation of oil Housing in the two cities has industry jobs from other oil tended to reflect their white attract back into the industry. cities, stealing white-collar collar/blue collar split, with the The rapid growth of the Hisemployment in particular, an majority of the housing priced panic population in Odessa, option unavailable to Odessa – above $175,000 concentrated in drawn there by the availability Midland. Bakersfield, another Midland. Odessa has opened of these oil-field jobs, helps oil city with very close ties to several developments in higher explain the growing gap in the nearby oil fields, has also done price ranges in recent years to ethnic mix of Ector and Mida good job of maintaining its try to break out of the blueland counties in Table 1. share of income. collar box it feels locked into. Oil still matters in Odessa – Medical care has strengthened The Odessa–Midland Economy Midland, and the current oil substantially in recent years, We don’t know of any preupturn seems to be carrying especially in Odessa, where a cise estimates, but several peothe rest of the economy once growing community of physiple we interviewed in Midland more. Wage and salary employcians from India has brought a and Odessa offered estimates ment has begun to rise, and the variety of new medical specialthat the two cities remain 70 to unemployment rate has been fallties to the region. A new $37.5 80 percent dependent on oil and ling slowly since late last year. million Alliance Hospital, the natural gas. In Houston, about Sales taxes rose above yearthird in Odessa (along with one 50 percent of local jobs depend earlier levels in the second in Midland), brings breakthrough, on upstream and downstream quarter of this year, after a subless invasive methods for heart energy, given the multiplier efstantial decline throughout 2002. surgery. Medical office buildfect of oil as it ripples through New and existing home sales ings have been a staple of the economy. Figure 3 conhave been strong since the sumOdessa’s construction figures in trasts the behavior of Odessa – mer of 2000, driven more by recent years, and an adjacent Midland employment with low interest rates than by ecohotel is now being built to comHouston’s. Clearly in recent years nomic momentum. plement the medical complex. the smaller cities have been The dependence of the reOne success story for the much more responsive to swings gion on oil raises concern in region has been the growth of in the rig count than Houston, both cities about a future withretail trade in the past decade. especially during the severe out oil. While oil and 1998 – 99 decline. Table 2 natural gas will not disTable 2 shows another way Five Oil Cities, 1969–2000 appear tomorrow, the to look at the Odessa–Midland Share of Personal Income Earned in Oil and Gas Extraction fields have reached the MSA’s dependence on oil. It Percent tertiary stage of producshows the percentage of local City 1969 1979 1989 2000 tion and are in decline. personal income generated by Odessa–Midland 20.8 18.2 18.1 18.9 Fortunately for the reoil and gas extraction and comHouston 4.4 7.0 7.3 8.0 gion, both cities have pares it with other oil cities Tulsa 7.5 8.2 5.9 4.6 invested in strong assets from 1969 to 2000.3 Odessa – New Orleans 5.4 5.2 4.5 2.9 to build a more diversiMidland runs away with the Bakersfield 5.8 6.9 6.7 4.6 fied economic base. PriHouma–Thibodeaux 14.8 16.4 9.2 8.7 comparison for highest share 4 SOURCE: Bureau of Economic Analysis. Overlooked by many marketers because Odessa–Midland had been treated as two separate metro areas, the combination of the two into a single MSA in 1993 attracted a host of big box stores and restaurant chains.5 On marketers’ computer screens, the metro area population seemed to double overnight. Most were initially attracted to the higher per capita income of Midland (see Table 1 ), but many later opened facilities in Odessa as well. Just as Odessa’s western location allowed it to serve the oil fields, an Odessa location allows retailers to draw customers from the same fields as well as from the nearby cities of Monahans, Kermit, Pecos and Fort Stockton. While total employment grew 9.9 percent from 1990 to 1999, retail employment grew 13.9 percent. Both cities sought diversification in recent years. Odessa passed a 0.25 percent sales tax in 1997 for funds devoted to economic development. Midland followed in 2001. The most recent success has been location of a Family Dollar Store distribution center in a new Odessa industrial park, providing 500 new jobs and serving 2,300 stores in four states. Both Midland and Odessa have scored a chain of successes in call-center and back-office operations, attracting companies such as Cingular Wireless, Sitel Corp., SBC Communications and AccuTel. In their development efforts, the two cities have found reason to set aside their traditional rivalry and cooperate. Like most pairs of successful urban rivals— Houston – Dallas, Dallas – Fort Worth and Minneapolis – St. Paul — the cities are economic complements more than competitors. If they really did the same thing, one would have won out sometime during the last century to dominate the other. Their persistence indicates they really play different roles and serve different interests. In their economic development efforts, the cities offer a much more complete package by marketing themselves jointly, whether it is excess office space and upscale neighborhoods in Midland or high-quality machine shops and excess wastewater capacity in Odessa. The Midland – Odessa Transportation Alliance (MOTRAN) has been a vehicle for a number of successful cooperative efforts. The only rail service in the region is still the same east– west line on which the cities were founded, now operated by the Union Pacific. Because every major U.S. metro area is located on a rail crossroads, MOTRAN has worked with the state to try to secure north – south service as well. It has also promoted a trade corridor through West Texas called La Entrada al Pacifico, connecting Odessa – Midland and much of West Texas to Ciudad Chihuahua and perhaps ultimately to Mexican ports on the Pacific Ocean. Conclusion The Odessa – Midland economy remains very much in the grip of oil. However, it is apparent that the oil funds have been invested wisely in education, infrastructure and housing and that efforts are ongoing to improve the business climate through better roads, rail connections and industrial diversification. Odessa – Midland has wisely prepared for life after oil. The cities clearly complement each other, playing very different roles in the regional economic system, and cooperation allows them to market a much more complete product to the rest of the world. There is a more specific lesson for other oil cities as well. The current moderate recovery 5 in the oil patch is not being felt very strongly, even in Odessa – Midland. Of all major oil centers, this is the most sensitive to upstream activity, but it is seeing only slow but sure improvement in the local economy. There is no sign of the boom that current high prices for energy might suggest. The lesson for Houston, New Orleans, Tulsa and other oil cities is that the local impact of this oil expansion should be even more moderate than in Midland and Odessa. — Robert W. Gilmer Timothy K. Hopper Scott Schwaitzberg Gilmer is a senior economist and vice president and Hopper a senior economist at the Federal Reserve Bank of Dallas’s Houston Branch. Schwaitzberg was a summer intern from the University of Texas. Notes 1 2 3 4 5 This section draws from the following articles in The Handbook of Texas Online (www.tsha.utexas.edu/ handbook/online): “Midland County,” “Midland, Texas,” “Ector County” and “Odessa, Texas.” Also, Roger M. Olien and Diana Davids Olien, Oil in Texas: The Gusher Age, 1895 –1945 (Austin: University of Texas, 2002), pp. 149–64. From Permian Basin Oil Statistics on the University of Texas of the Permian Basin web site, www.utpb.edu/PBDPL/ Statistics/main_permian_basin_ petroleum_statistics.htm. The share shown here is for all mining employment because of disclosure problems. Mining, however, is an excellent proxy for oil and gas extraction in all of these cities. American Chamber of Commerce Researchers Association, data for the second quarter of 2003. The Office of Management and Budget has recently announced yet another sweeping set of changes to the definition of metropolitan areas that would once more separate the Odessa – Midland MSA into two metro areas. All metro area data used here are based on the combined-county definition, which is still in use for most statistical reports. Houston T here was scattered good news from Beige Book respondents this time: improving retail sales, a number of capital projects finally moving forward, more upbeat attitudes among most respondents and continued strong home sales. But the improvement has yet to spill into the job market or into other objective measures of the local economy. We are still waiting for real improvement in the Houston economy. Perhaps the wait may finally be coming to an end in the months just ahead. Retail Sales Retailers were cautiously optimistic that they had reached bottom and business is beginning to recover. Most retailers reported traffic counts similar to last year and sales that had at least turned up, even if they were not yet matching last year’s. One complaint was that lower costs, especially for large durable items like furniture, make it difficult to match last year’s sales levels. The sales tax holiday was a big success this year for retailers selling back-toschool merchandise. Real Estate Both home resales and new home sales remained strong through July, with many buyers pushing to close before interest rates rise further. Existing home sales in Houston were up 9.2 percent from last July, and new home sales are up by 5 percent year-to-date. The questions being asked are how high mortgage rates will rise and how quickly they will choke off sales. BeigeBook August 2003 The overall office market continues to register negative absorption figures and declining rents. Most of the damage is being done in the central business district and Galleria markets. Suburban markets are comparatively strong. Energy Prices and Exploration Crude oil prices moved in a narrow range in recent weeks, as West Texas Intermediate stayed near $30 per barrel. There was little news to move crude prices, although inventories remain only a couple of percentage points above 27-year lows. Natural gas prices fell steadily as storage continued to refill at a faster than normal pace. Prices slipped under $5 per thousand cubic feet in late July, down 60 percent from February. Gas in storage is only 9 percent below the five-year average instead of 35 percent, where it was earlier this year. Reductions by large industrial users—shutdowns or fuel-switching—seem to account for much of the additional gas moving into storage. The domestic rig count has continued to flatten out in recent weeks, as producers turn conservative in the face of declining natural gas prices. International drilling remains strong, driven by oil prices. Oil service respondents continue to report a market that is good, if not great. They continue to be moderately optimistic about the near- term outlook for drilling but remain cautious about hiring and vigilant in controlling cost. Gasoline and Refining Refinery outages during the Northeast’s blackout came at a particularly bad time, with inventories at an eight-month low, the Labor Day holiday approaching and coming on the heels of a number of other refinery outages in Texas, Oklahoma, California and Venezuela. The seven refineries knocked out of service in the United States and Canada have restarted, but retail price is expected to spike briefly by at least 10 cents a gallon, adding to other recent increases of 5 to 6 cents. Refiners’ margins had improved moderately in recent weeks, and the blackout should give them another short-lived boost. Petrochemicals Chemicals face continued weak demand, and prices have fallen again for ethylene, propylene, polyethylene, polypropylene and polyvinyl chloride. The decline in the price of natural gas has moved light feedstock plants (such as most on the Gulf Coast) back into rough parity with naphtha-based plants and has reopened some export markets for regional petrochemicals. Pessimists insist this situation is temporary because the downside risks for oil prices are much greater than for natural gas. For more information or copies of this publication, contact Bill Gilmer at (713) 652-1546 or bill.gilmer@dal.frb.org, or write Bill Gilmer, Houston Branch, Federal Reserve Bank of Dallas, P.O. Box 2578, Houston, TX 77252. This publication is also available on the Internet at www.dallasfed.org. The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or the Federal Reserve System.
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