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 and Pioneer Natural Resources . 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.

The article Will the Ghosts of Texas' Past Haunt Its Future? originally appeared on Fool.com.

Matt DiLallo has the following options: long January 2014 $70 calls on Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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