Midland Braces for Impact as Drilling Slows

Sales tax receipts in the thriving oil town of Midland, Texas, fell this month, only the third decline in five years and one of the first signs of how low oil prices are beginning to ripple beyond oil company bottom lines and into the wider economy.

Midland's sales tax revenues, which reflect commercial and residential spending, dipped to $5.119 million in March from $5.126 million in March 2014, according to data from the Texas Comptroller released last week.

The fall was slight, but it was just the third year-over-year decline since April 2010, when an oil production boom was just beginning to transform Midland.

It also marks a stark and potentially protracted turnaround from recent years: last year in March, when oil prices soared above $100 a barrel, sales tax receipts increased 11 percent.

"These numbers are more significant to me than anything else," said Karr Ingham, an economist who compiles the Texas PetroIndex, an annual analysis of the state's energy economy.

"There is no doubt that local spending is going to suffer, and we are just seeing the beginning of this," said Ingham, who expects an economic downturn to last for months and potentially years, even after oil prices rebound.

Midland has a population of around 140,000, and an economic decline there alone should not seriously dent the state economy. However, the town has become a potent symbol of the oil boom, and its economy could shed light on the potential future impact for Texas and other oil producing regions across the country.

Moreover, the fact that the first cracks in the Midland economy are appearing nine months after oil prices began falling, highlight how long it can take for an oil price slump to seep into a more general economic indicators.

At the heart of the Permian Basin, one of the biggest oil deposits in the country, Midland experienced lightning fast growth over the past five years as energy companies flocked in, bringing jobs, investment and large construction projects.

Now, a 50 percent drop in oil prices since June to below $50 a barrel, the biggest decline since the recession, has forced drillers to cut their workforces, slow drilling and halt investments.

The city's overheated housing market has also shown signs of easing. The 514 unsold houses on the market in Midland County in January was most in years, according to county statistics. The average sale price fell 20 percent from June to January. Foreclosures starts jumped 193 percent from 40 in 2013 to 117 in 2014, with most of that growth occurring in the second half of the year, according to data from Realty Trac.

"The most visible sign of cracks in the armor of the Midland housing market is the rise in foreclosure starts in 2014," said Realty Trac vice president Daren Blomquist.

City officials are aware of the early warning signs. An annual city council retreat that will focus on maintaining economic growth amid the oil industry downturn has been delayed until May to allow the city to gather more sales tax data before making budgeting decisions, said Midland mayor Jerry Morales.

"We feel this is a cooling period," he said. "We know sales taxes will decline, we just do not know to what level."

So far, the effects have been limited. Oil companies including Chevron (CVX), Occidental Petroleum (OXY) and Schlumberger (SLB) are all building facilities in Midland, according to city building official Steve Thorpe. Apache Corp and EOG Resources (EOG) have sought approval for building permits.

The City Council is considering a permit for a $100 million boutique hotel, health club and food emporium on city land. A plan by Xcor Aerospace to build a launch pad for 90-minute, $90,000 tourist space shuttle rides from Midland airport remains on track.

It is anyone's guess how long oil prices will remain depressed. Some say it could be months, even years, before oil producing regions recover from low oil prices.

"There is an incorrect assumption that we are further into this than we already are," said Ingham. "We have a long way to go."

By Edward McAllister