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Will the Ghosts of Texas' Past Haunt Its Future?

Photo credit: Flickr/Earl Ray Saathoff

The unconventional oil and gas craze has the Texas economy booming. Just last quarter, the state's oil and gas industry added a net 2,400 new jobs, which made it the top state for energy job growth in the nation. Overall, that represented a 2% increase in new oil and gas jobs for Texas, which far outpaced the state's overall employment growth of 1.6%. Overall, the state supports close to 2 million oil and gas jobs, while the sector represents nearly a quarter of the state's economy.

There have been oil booms in Texas before. Unfortunately, the bigger the boom, the bigger the subsequent bust. In fact, the state is also home to some 250 ghost towns, some of which were boom towns during the last oil boom. However, this time around, the boom appears to be much more sustainable for two reasons. First, during the oil boom of the late 1970s, Houston, for example, was 90% dependent on the energy industry for its industrial activity, which simply isn't the case today as the statewide economy is much more diversified. Second, the scope of the resource base and the fundamentals driving the world's oil markets are much different this time around.

Diversification: important for investors and economies alike
While seven of the 10 largest public companies headquartered in Texas are in the oil and gas industry, the state has been slowly diversified into other industries. Home-grown enterprises like Round Rock-based Dell ranks sixth overall in terms of total revenue. While the world's No. 3 PC maker has been struggling of late, it still employs more than 14,000 in central Texas, making a very important addition to the diversity of Texas' economy.

The state's economy is further diversified in that it's the home of several large corporate subsidiaries. For example, Berkshire Hathaway's subsidiaries McLane Company, which is in the grocery wholesale business, and BNSF Railway, which is Warren Buffett's big bet on the rails, are both headquartered in Texas. The list goes on, but the bottom line is that Texas has focused on diversifying its economy away from oil and gas. This diversification will help cushion any blow if oil prices do take a hit.

Industry fundamentals: massive reserves and a fundamentally different market
Oil and gas still rules the roost, so to speak, in the state, and recent oil finds mean that its dominance won't be waning anytime soon. The state is home to not one, but two top-tier oil plays. In fact, the Spraberry/Wolfcamp formation in the Permian Basin is estimated to have 50 billion barrels of recoverable oil and gas. That makes it the world's second-largest oil field. Meanwhile, the Eagle Ford Shale is estimated to hold more than 25 billion barrels of recoverable oil and gas. For perspective, the Eagle Ford alone has nearly the combined estimated recoverable resources of both the Bakken in North Dakota and Prudhoe Bay in Alaska.

Needless to say, that's a large runway of growth for companies like EOG Resources (NYSE: EOG  ) and Pioneer Natural Resources (NYSE: PXD  ) . In fact, Pioneer believes that on its Permian acreage alone is the potential to drill 40,000 future wells to recover 9 billion barrels of oil and gas, which would represent nearly $400 billion in future capital investments. Oil production is really expected to grow as the industry develops this play:

Source: Pioneer Natural Resources

The Eagle Ford also has a long runway of growth. EOG sees at least a dozen years remaining on its current drilling inventory. In fact, the company believes that it has the potential to capture nearly 8% of all the oil that will be recovered out of the Eagle Ford as its wells produce over time.

Not only are the oil reserves recently discovered simply massive, but because of the cost of developing shale resources, a fundamentally different market has been created. The days of cheap oil really are gone -- the industry needs oil to stay above $100 per barrel to make a decent profit. Moreover, resources like the oil sands in Canada and deepwater regions around the globe are really expensive to develop. This suggests that a bust resulting in oil prices plummeting isn't as likely in the future because producers would simply stop investing until oil prices rose back to profitable levels. Additionally, worldwide demand, especially with voracious demand from China, which is about to overtake the U.S. as the world's top oil importer, means oil prices are likely to stay elevated.

Final Foolish thoughts
The ghosts of Texas' past aren't likely to haunt it anytime soon. Not only has the state gone to great lengths to diversify its economy away from oil and gas, but it really is in a prime position to benefit from the current oil and gas boom; it has massive reserves to fuel a fundamentally different global economy.

Oil likely will stay above $100 because that's the price where producers, especially those in OPEC, need it to be in order to profit. In fact, the market isn't likely heading meaningfully below that level for a long time. That is why investors need to be positioned to profit from $100 oil. To help investors get rich off of rising oil prices, our top analysts prepared a free report that reveals three stocks that are bound to soar as oil prices climb higher. To discover the identities of these stocks instantly, access your free report by clicking here now.

Read/Post Comments (5) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 14, 2013, at 6:23 PM, comosichiam wrote:


  • Report this Comment On August 14, 2013, at 7:40 PM, luckyagain wrote:

    "The days of cheap oil really are gone -- the industry needs oil to stay above $100 per barrel to make a decent profit."

    This says it all. Of course not more than a few years ago, oil was selling for a lot less. So what goes up can and will go down. It is the general economy that causes oil to be above $100/barrel. So if the general economy slows down or goes back into recession, oil will go down too.

    This article says that if oil goes below $100/barrel that it will "This suggests that a bust resulting in oil prices plummeting isn't as likely in the future because producers would simply stop investing until oil prices rose back to profitable levels." That is the rub because when oil companies stop investing, they have to get rid of employees and expenses. It is not like turning a faucet on and off. Nothing happens instantly. Once the oil companies stop drilling for oil, restarting take a lot of time. So a bust could happen in the oil industry like it has happened many times before.

  • Report this Comment On August 14, 2013, at 8:59 PM, gumby68 wrote:

    comosichiam Texas is all republicans and has been for 33 years. When the oil runs out Texas will be a ghost state.....

  • Report this Comment On August 14, 2013, at 9:22 PM, savage393 wrote:

    Como: The last few years have been dominated by the GOP in the federal government. Seen any spending go down. I didn't think so. The GOP (house) controls the purse strings. That is in the constitution. Spending didn't go down at all, until sequester, that can't be undone by congress at a whim. Spending is the same, no matter which party is in charge. Tax and spend, or cut taxes and still spend, which is worse?

  • Report this Comment On August 14, 2013, at 10:08 PM, jdbryce2 wrote:

    As Davy Crockett said and I quote "You may all go to hell and I will go to Texas". Best state in the Americas by far don't mess with Texas. If you live somewhere else sorry........

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