Economic conditions - Texas ; Cities and towns ; Gas industry ; Petroleum industry and trade

Charles James

Robert W. Gilmer

English

Research Papers in Economics

SpotLight
FEDERAL RESERVE BANK OF DALLAS • MARCH/APRIL 2008 SouthwestEconomy 7
Midland and Odessa
Midland  and  Odessa  lie  only  20  miles 
apart on West Texas’ arid plains, but a com-
bination of historical accident and geogra-
phy give each a different role in the industry 
that determines their destiny. 
The  Permian  Basin’s  first  commercial 
oil well started pumping in 1921, and Mid-
land  and 
Odessa were 
boomtowns 
by  the  late 
1920s.  Mid-
land  offered 
the best ho-
tel and drew 
oil company 
executives, 
i n ve s t o r s 
and  specu-
lators.  The 
city  became 
home to white-collar corporate oil, with a 
per capita income of $40,885 in 2005, top-
ping the state’s $32,460.
Odessa’s location to the west positioned 
it closer to the oil fields, giving the city an 
advantage in the blue-collar oilfield service 
and machinery industries. Its per capita in-
come was $25,590 in 2005.
Despite  their  differences,  the  two  cit-
ies have been yoked together in the booms 
and busts of the oil business. Job growth has 
been an on-again, off-again proposition  for 
both (Chart 1). For example, a sharp decline 
followed the collapse of oil prices in 1997–98. 
Now in full boom, the cities have separated 
themselves from the rest of the U.S. since oil 
prices per barrel moved above $40 in 2004 on 
their way to triple digits.  
The seasonally adjusted unemployment 
rate in February 2008 pushed down to 2.7 
percent in Midland, the lowest in the state, 
and to 2.9 percent in Odessa, well below the 
state’s 4.1 percent, a historic low. 
Midland and Odessa form the economic 
hub of the Permian Basin region that stretch-
es  across  West  Texas  and  southern  New 
Mexico. Drilling activity fluctuates with en-
ergy prices and drives such economic indi-
cators as the unemployment rate (Chart 2).  
The Permian Basin rig count fell to a 
cyclical low of 43 in early 
1999, when oil hit $10 per 
barrel, and then found an-
other bottom of 85 in early 
2002  on  the  heels  of  the 
U.S.  recession.  Rig  counts 
climbed  rapidly  over  the 
next  few  years,  flatten-
ing out over the winter of 
2006–07 and crawling past 
200 in early 2008—a level 
not  seen  since  the  mid-
1980s. 
Historically a black-oil 
region,  the  Permian  Basin 
has  turned  increasingly  to 
natural  gas  over  the  past 
decade.  Recent  data  show 
about  a  third  of  drilling 
activity directed to natural 
gas. Some gas is associated 
with oil, but drilling direct-
ed to exclusively deep gas 
or  gas  in  tight  sands  has 
been active for some time, 
and unconventional gas in 
the Barnett and Woodford 
shale formations is now at-
tracting significant interest. 
Today, the Permian Ba-
sin  produces  16.4  percent 
of the nation’s oil and 7.1 
percent of its natural gas.
Every  Permian  Basin 
economic  report  in  recent 
years  has  emphasized  not 
only the high level of eco-
nomic activity but also the 
severe  labor  shortages  that  accompany  it. 
High wages paid by the local oil industry allow 
it to hire labor away from other local businesses 
at will, creating big problems in these relatively 
isolated communities. 
Non-oil businesses are being hurt. Some 
have closed. Restaurants are trying to save 
labor, with some full-service establishments 
closing rear sections and fast-food places op-
erating only drive-through lanes at night. New-
home construction has slowed to a standstill.  
Boom times are back for now, but re-
source-driven regions like the Permian Basin 
face a recurring dilemma. At the bottom of 
every cycle, when the oil industry is shrink-
ing and times are tough, nothing is pursued 
with more fervor than industrial diversifica-
tion. Yet, on the way up, the oil industry can 
be  so  profitable  it  pushes  other  business-
es to the side. At the peak, diversification 
dwindles. Any cushion for the downside is 
gone—and the downside has always come 
in commodity industries.
—Robert W. Gilmer and Charles James
Permian Basin Cities Ride Oil Boom Again
Chart 2
Permian Basin Rig Count Plotted Against  
Midland–Odessa Unemployment Rate
Index, first quarter 1990 = 1
NOTE: Data for all years are first quarter only.
SOURCES: Smith International; Bureau of Labor Statistics.
Rig count
Unemployment rate
0
.5
1
1.5
2
2.5
’06 ’04 ’02 ’00 ’98 ’96 ’94 ’92 ’90
Chart 1
Midland and Odessa Job Growth
Compared with U.S.
Index, January 1990 = 1
SOURCE: Bureau of Labor Statistics.
Midland
.9
1
1.1
1.2
1.3
1.4
1.5
’08 ’06 ’04 ’02 ’00 ’98 ’96 ’94 ’92 ’90
Odessa
U.S. 11th District Places
Midland
•
New Mexico
Texas
Mexico
•
Odessa

Spotlight: Midland and Odessa: Permian Basin cities ride oil boom again

http://dallasfed.org/assets/documents/research/swe/2008/swe0802d.pdf

Spotlight: Midland and Odessa: Permian Basin cities ride oil boom again

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Research Papers in Economics