Blog Post

New Technologies Reinvigorate West Texas Production, Government Revenue

Jan 24, 2014 | Daniel Raimi

Since the 1920s, West Texas’ Permian Basin region has relied on oil and gas production as the driving force of its economy.

Well completions in three Permian Basin counties.

After a boom period in the late 1970s and early 1980s, the region suffered economically through much of the 1980s and ‘90s, as low oil prices dried up business for the hundreds of oil field equipment and service companies through the region. Local officials described the neighboring cities of Midland and Odessa as “ghost towns,” during these years, as major oil companies such as Chevron and Phillips pulled most of their corporate offices from the region.

Today, the Permian is booming again. Midland and Odessa’s restaurants are packed on weeknights, modest hotel rooms recently rented for as much as $300 per night, and some small oil and gas companies that survived the slump have grown into large independent producers with gleaming new office towers and billions of dollars in annual revenue. The same types of technologies that have led to production from shale plays around the country have reinvigorated a variety of long-producing formations in the Permian basin and enabled production from “tight” plays such as the Wolfcamp and Cline shales.

In the dusty city of Andrews — the seat of Andrews County roughly an hour north of Midland — this increase in drilling has led to a surge in economic activity, with city sales tax revenues increasing from roughly $1 million in 2005 to $4.3 million in 2012. Since Texas does not allocate any of its severance tax revenues directly to cities, sales tax is the primary revenue source that has allowed Andrews and cities like it to manage increased costs associated with increased population and economic activity.

Three drilling rigs in a cotton field in Andrews County, Texas.

And since the heavily-trafficked roadways that run through Andrews are owned and maintained by the state of Texas, the city has not seen the types of new infrastructure costs experienced by some other local governments. Instead, the increase in revenue has helped the city build a new “loop road,” invest in new business parks on its outskirts, and upgrade sewer and water infrastructure that had long needed repair.

In Midland — the heart of the region’s oil industry — growing economic activity in recent years has benefited city residents and businesses, but local officials described the impact on government finances as a wash. Although total city revenues grew from $162 million in 2009 to $183 million in 2012, the extensive road network owned and maintained by the city has seen substantial increases in maintenance and repair costs. Indeed, city officials estimate that roughly $50 million in upgrades are needed to keep pace with the surge in heavy truck traffic, and a rapidly growing population has led to increased costs across city departments.

Clearly, the surge in population and costs experienced in Midland has been more substantial than the increased costs for a smaller, more rural city like Andrews. New workers and businesses appear to prefer locating in the more urban cities of Midland and Odessa. Although production occurs throughout the entire region, Midland and Odessa have captured the lion’s share of new population.

An oil pump jack in a residential neighborhood of Seminole, Texas.

The Permian basin has a long history of oil and gas production, and local officials are generally happy about the recent surge in production. As the driving force behind the region’s economy, the oil and gas industry’s ups and downs are seen as par for the course, addressed by a local government strategy of investing in capital upgrades during the good years, putting money away where possible, and keeping fixed costs low. This way, local officials believe they can maintain a high quality of services for residents regardless of fluctuations in the business.

This research was carried out at the Duke University Energy Initiative with support from the Alfred P. Sloan Foundation.