This opinion piece presents the opinions of the author.
With Texas crude oil output increasing too quickly for state regulators to track, the Texas Petro Index (TPI) set another new high in September, brushing aside signs that the state’s upstream oil and gas economy could be approaching a plateau to reach a record 292.2.
“Texas oil and gas producers respond very impressively to market signals,” said Karr Ingham, the economist who created the TPI and updates it monthly, regarding the TPI’s record-setting climb. “Over the past several years, the industry has responded to higher crude oil prices by driving up production at a rate that borders on the miraculous.”
According to Texas Railroad Commission estimates, Texas producers recovered more than 69.9 million barrels of oil during September, 17 percent more than in September 2012. But crude output has grown even faster than current numbers would indicate. In the 12 months since its initial estimate, the commission revised September 2012 crude output upward by more than 12.5 million barrels to about 59.8 million barrels, an increase of about 26.5 percent.
Ongoing, upward revisions of statewide crude output have been substantial enough to offset declines this year in crude oil prices, the rig count and drilling permitting activity. In fact, adjustments of crude production in just one month were enough to lift the August 2013 TPI from 289.8--the previous record--to 290.2.
“It may well be that the industry's spectacular success at increasing crude production in Texas, across the U.S. and elsewhere will result in significantly lower wellhead prices and a corresponding decline in aggregate levels of upstream activity,” Ingham said. “Remember, the purpose of high prices in a correctly functioning market is to stimulate production and discourage demand, ultimately resulting in lower prices.
“Crude oil markets in Texas are functioning fabulously and prices are coming down. In the next few months and in 2014, crude oil producers must be wary. The great success they’ve achieved in cracking open new sources of supply and raising production is supposed to result in lower prices and, in fact, that may well be the case.”
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