Is the U.S. Oil Boom Out of Balance?

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It's boom time in Texas. From the Eagle Ford shale to the Permian Basin, it's practically raining money.

Now you would think that would be a positive for the local economies. But as this boom unfolds, it is not without its own share of problems.

In its wake, the production largess in Texas has led to fast-rising electricity costs. This counterforce is wreaking havoc on localities across the region, especially small businesses.

In fact, a number of local non-oil end users have already reported a 20%-25% increase in electricity costs, with more expected to follow.

It is the other side of the latest Texas oil boom and it's an example of how energy costs can actually go higher as the volume of crude surges.

That's because drilling for oil is a very power-intensive undertaking, as are the associated services of maintaining pressure, operating separation and running the related initial field processing equipment. Not to mention the ancillary usages of electricity ranging from field office lighting to dust control.

As a result, the region encompassing El Paso in Texas and Las Cruces in New Mexico now has an expanding power deficit.

It is one of several examples how the resurgence of one energy source can result in adverse pressures on another…

Trouble on the Grid

In what is developing into a drilling frenzy – caused by a combination of rising crude prices and a greater reliance on domestic production to meet U.S. market demand – the increased power demanded has outstripped the ability of the regional grid.

As the demand for the power increases, so also does the price of that electricity.

And whenever this type of industrial demand ramps up, the greater bulk users tend to benefit the most. Even though overall electricity prices are increasing, the prorated portion earmarked for the largest user results in a net advantage in actual unit costs.

On the other hand, smaller (almost always local) businesses will realize a higher spike.

Now sometimes this will even out moving forward, as the profitability in the regional economy "trickles down" elevated sales and revenues to other sectors.

However, that is often not the case with oil and natural gas production, at least in the near and medium term.

That is because, while there will be some residual advantage to local service and material providers when the enhanced drilling programs are introduced, most of the profits move elsewhere.

And Texas is not alone…

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About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle

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