Sorry, but there's no other way to say it: Midland, Texas, is booming

By BEN CASSELMAN
June 30, 2008;PageR14

MIDLAND, Texas -- No one in this quintessential oil town will use the word "boom."

Booms, after all, inevitably mean busts to come, as the vacant office towers that line Midland's downtown still attest.

With oil priced at more than $100 per barrel, WSJ's Ben Casselman reports on how one oil town is experiencing a boom. In Midland, Texas, he says, jobs are plentiful and homes are selling faster than builders can construct them.

But as oil prices have soared above $100 per barrel -- and, to nearly everyone's surprise, remained there -- it is becoming increasingly difficult to find another word to describe this west Texas desert town's fortunes. Midland is booming.

The downtown Petroleum Club is full again. The banks that closed up shop in the 1980s are back, once again writing loans for oil production. Oil companies are racing to drill wells -- there were 200 drilling rigs active in the area at the end of 2007, double the number three years earlier. The only thing stopping companies from expanding even faster is a razor-thin labor market that has pushed wages for common laborers above $20 per hour. The school superintendent is worried about high-schoolers dropping out to take lucrative jobs in the oil patch.

"It's just incredible, the competition for labor," says Robert Landreth, who runs a small oil-production company in Midland.

The boom has ripple effects far beyond the oil industry itself. Houses are selling faster than builders can construct them. Hotels are booked up, and five new ones are being built around town. Restaurants are packed, and on weeknights the downtown Wall Street Bar & Grill is full of construction workers swigging cocktails mixed with pricey Grey Goose vodka.

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Midland isn't the only town benefiting from oil's rise. The broader Texas economy has been buoyed by a surge in drilling that has seen rigs spring up at airports, on college campuses and even in suburban neighborhoods. Other states, from Oklahoma to Alaska, are getting in on the action too.

But nowhere are the effects clearer than in Midland. When the price of oil slumped in the 1980s, major energy centers such as Houston and Oklahoma City set out to diversify their economies and protect against future busts. Not Midland. The city's economy has remained rooted in oil, roughly three times as dependent on the industry as Houston, according to economist Ray Perryman, of Waco, Texas. As a result, Midland's economy has limped along for 25 years, occasionally sparking to life when oil prices spiked, as they did after the Persian Gulf war in 1991.

"A lot of people have been waiting for this for a long, long time," Mayor Wes Perry says.

Getty Images
PUMP IT UP Oil is pumped out of the ground near Midland, Texas

New Caution

Yet now that the waiting is over, Midlanders have been more cautious. The Rolls Royce dealership that did a brisk business in the 1970s hasn't returned. The airport is busy, but the planes are Southwest Airlines' 737s, not the Lear jets that spilled off the tarmac and onto the grass during the last boom. Many producers delayed ramping up their drilling, waiting to see if prices returned to earth.

"People were slower to respond to this one," Mr. Landreth says. "It's caught many of us by surprise that it has lasted with the intensity it has."

Such caution is the legacy of the 1980s bust. Old-timers still remember the October day in 1983 when the First National Bank of Midland closed its doors, the victim of bad bets on the oil patch, and the lean years that followed. And they don't hesitate to preach temperance to the exuberant new generation relishing this latest surge.

Slowly, however, Midlanders are beginning to believe. Oil producers point to differences in this cycle: Demand is being driven by industrialization in India and China, not by the fickle U.S. economy; and supply is constrained by the rising cost of extraction, not by production caps imposed by OPEC.

Mr. Landreth, who's been in the oil business for more than 30 years, held off drilling new wells last year even as prices skyrocketed. But now he's begun drilling again. "I guess I am coming around to the opinion that $100 oil is here for a while," he says.

A TEMPERED BOOM

•What's Happening: Thanks to surging oil prices, high times have returned to Midland, Texas, an archetypal oil town that has been through boom and bust before.

•Signs of Success: Banks that closed in the 1980s are open again, lending to companies racing to drill wells. Labor is in short supply, and pay is high.

•Yet It's Different: Wary from their earlier experience, many residents are more circumspect about their wealth. Town officials, too, have diversified the local economy with call centers, manufacturing and other energy ventures that aren't dependent on oil.

Signs of Midland's growing confidence are everywhere. Cranes rise above downtown. Parking lots are full of out-of-state license plates. The hospital is expanding its maternity ward to accommodate an oil-boom-sparked baby boom.

Midland's housing inventory couldn't keep up with the influx of new residents. Average home prices rose 19% in February from the previous year. Chas Perry, the 25-year-old son of the city's mayor, had so much trouble finding a home last year that when his wife saw someone hammering a "for sale" sign into the lawn, she pulled over and made an offer on the spot. Laura Roman, a local accountant, sold her home in less than 12 hours last year -- even though she made the buyer wait four months to move in.

The labor market is even tighter. In the latest data available, state officials put Midland's unemployment at 2.7%, the lowest rate in Texas and 2.8 percentage points below the national rate. Mitch Patel, a hotel developer who's building a Courtyard by Marriott in town, says he's brought in workers from as far away at Tennessee; even so, the project has been delayed by labor shortages.

Stronger Now?

Many argue that even if oil prices drop, Midland's economy won't be decimated. Financial controls are tighter, lending practices are more stringent, and the high cost of drilling technology has kept less-experienced speculators on the sidelines. Tracy Elms, who runs an accounting firm in town with many oil and gas clients, says he received a $1 million unsecured line of credit back in the 1980s and used it to buy a Mercedes Benz and a condo. No one is lending money like that anymore, he says. "This period is totally different from the '80s in all respects."

But while Midland's economy might survive a drop in oil prices, its rapid growth likely would not. Three years ago, the city would have rejoiced at $50 oil; today, many producers are drilling wells that require oil prices of $60 or even $80 per barrel to be economical. Those producers might not go bankrupt if the price of oil fell, but they would slow or stop their drilling -- ending the boom that's kept hotel rooms and restaurants full.

Today there's a shortage of rigs and labor, says Larry Oldham, chief executive of Midland-based Parallel Petroleum. But if oil fell, Mr. Oldham says, "you might wake up and have a tremendous surplus of everything, because the economics have changed."

City leaders are preparing for that day, trying to apply the lessons of the last bust and diversify Midland's economy. Voters approved a 0.25% sales tax in 2001 to fund economic development. The city has recruited call centers, aviation manufacturers and energy companies whose fortunes are less dependent on commodity prices, such as wind power and nuclear research.

The city is taking advantage of a full war chest -- generated by sales-tax receipts that are up nearly 11% from last year, rising for 57 consecutive months -- and its residents' fat wallets to finance improvements. The hospital is raising money for a $140 million expansion, and the University of Texas of the PermianBasin is building a $66 million performing arts center. So far, most downtown development has involved refurbishing office buildings, but local officials are pushing for retail and condo projects.

Seize the Day

Leading the charge is Mayor Perry, a Midland native raised in the oil industry by his "land man" father, who secured drilling leases for oil companies. Mr. Perry grew up watching Midland's booms and busts, and he says he ran for mayor last year -- taking office in January -- because he wanted to end the cycle. Oil is a finite resource, Mr. Perry says. If Midland doesn't seize this opportunity, it may not get another one. He spent his campaign, and his first months in office, arguing the point to anyone who would listen.

"I see the urgency, because I don't know how long we've got," Mayor Perry says.

But not everyone buys the case for diversification. David H. Arrington, the 47-year-old president of Midland-based David H. Arrington Oil & Gas Inc., is part of a new generation that hasn't seen a real bust.

"Being diversified is always tantalizing and sounds good," says Mr. Arrington. "But Midland, Texas, is an oil city."

--Mr. Casselman is a staff reporter in the Dallas bureau of The Wall Street Journal.

Write to Ben Casselman at