Texas Oil Overwhelms Infrastructure

The Texas oil boom continues unabated, but it may be an example of too much of a good thing.  In the Permian Basin alone, oil production has risen by 1.5 million barrels per day in the last three years.  That surge in production has maxed out pipelines, trucks and workers, resulting in higher costs and lower profits for some companies.  "Almost overnight it feels like in the Permian, the services and people were just consumed at a remarkable rate," says John Hopkins, managing partner at Woodlands-based Global Drilling Partners.  "Some services would charge many times more what they charged in other basins because there is such a high demand."

For that reason, many companies are slowing down their operations in West Texas, with some focusing on other states while they wait for more pipelines and infrastructure to come online in the Permian.  In addition, the strong economy and job market have reduced the available pool of oilfield workers, resulting in limited labor supply and higher labor costs.

Another factor is the sudden rising price of crude oil, which finished Wednesday at a four-year high of just over $76 a barrel.  "All of the sudden oil prices are up," says Phil Flynn, oil market analyst with Price Futures Group.  "A lot of those oil companies previously were losing money, so now they're playing catch-up and we can't get the oil out fast enough."

Playing catch-up is also what infrastructure has to do in the Permian Basin, in order to accommodate the massive amount of oil coming out of the ground.  However, Flynn believes these production issues ultimately could be a positive for the oil market.  "In the past, some of these shale producers produced too much oil ahead of the demand and they lost money," he says.  "Now, this may force them to be a little bit smarter about which barrels they produce, and the profitability per barrel."

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