D3

Read the article below to answer the 6 questions at end of page:

Texas oil industry faces prospect of collapse amid Covid-19 losses

Oil and gas producers are trying to reopen after a 'devastating' halt, but pessimism about an economic recovery is widespread

Jeffrey Lattea finally got his first unemployment check this week, a whole month after he was laid off again. The 34-year-old resorted to government assistance to cover his bills after losing his second job in theTexasoil and gas industry just six weeks into it.

"My first company laid us off to stabilize their balance sheet," the oil worker said, matter-of-factly. "I was able to secure a temporary position with another inspection company in Pasadena with a turnaround. They started doing layoffs after the first week, so I knew it was coming - but not that fast."

Lattea is among tens of thousands of workers across Texas - America's largest oil-producing state - who have lost their jobs since coronavirus shutdowns dried up demand. The shutdowns have led to apocalyptic headlines proclaiming that the state couldlose 1 million jobs, and at least$24bnby the end of the year. Oil and gas companies have paused or curtailed production and halted capital expenditures to conserve cash leading to mass layoffs as the world shut down.

In April alone, the industry shed ahistoric 26,300 jobsin Texas.

New coronavirus cases are increasing to record numbers and the state has paused its reopening plans. But the oil and gas industry cannot afford another shutdown as it smarts from one of its worst years in decades.

Oil prices were already depressed by overcapacity at the beginning of 2020, and nowhere did it hurt harder than in Texas, which accounted for41% of total US crudelast year. Then the global pandemic drove the price of its bread-and-butter oil brand, West Texas Intermediate, tonegative prices briefly in Aprilas the glut worsened. Even though the world is slowly reopening, there's widespread pessimism about a quick recovery in Texas and the oil and gas producing regions of the Permian Basin, the resource rich sedimentary basin that covers western Texas and south-eastern New Mexico.

"The demand for diesel, aviation fuel, gasoline and propane is not going to pick up until the economy starts to grow at a healthy pace again," said Patrick Jankowski, senior vice-president of research at Greater Houston Partnership. "We've reopened, but there's a difference between opening and growing again, and now we're just not there yet."

The oil and gas industry and related businesses contribute $557bn to the Texan economy, and support one in six jobs in the state, according to analysis from the Perryman Group. "In normal times, it comprises about 14% of the economy when you factor in exploration, production, pipelines, refineries, petrochemical operations, corporate headquarters, and the other aspects of the industry," emailed Dr Ray Perryman, the research firm's president. "Major production areas in the state are seeing devastating fallout, and no part of the state is unaffected."

Roughly 60% of the bankruptcies of American oil producers from the beginning of the year until the end of May were in Texas alone, according to data from the law firm Haynes and Boone. Workers in the West Texas oil patch saw the signs when the wells they worked in or supported started closing, rendering them jobless. Major exploration and production firms like Exxon Mobil, Chevron were shutting in, creating a domino effect of job cuts for oilfield services companies that support them. "Things just started slowing down and we heard that we were overproducing, and then everybody was back at the yard. I worked there for just about three months," said one truck driver who did not want to be named. He worked for 1845OilField Services.

Another epicenter of the collapse in oil activity in Texas is Houston, often called the "energy capital of the world". The Greater Houston Partnership tracks about 5,000 oil and gas businesses in the city, giving it more major oil jobs than anywhere else in the world. "A job in a plant manufacturing equipment like drilling rigs and pumps or valves can easily pay $100,000 a year. An office worker such as a geologist or a petroleum engineer probably earns $200,00 a year - quadruple typical compensation in Houston," says Jankowski.

Covid-19 exacerbated a crisis which had been developing from as far back as the end of 2018, when some analysts expected oil prices to rally out to$100 a barrel. The opposite happened.

"Rig counts, which are potential proxy for oilfield activity, fell starting around January 2019 leading to overcapacity, and lower prices," says Kunal Patel, a business economist with the Federal Reserve Bank of Dallas. In the second quarter of 2020, business activity in the sector hit its lowest level since the Dallas Fed started its survey four years ago.

"There's a lot of stress in the industry," says Patel. "There's been a major pullback in drilling and completing wells." The outlook of the 168 energy firms in Texas, northern Louisiana and southern New Mexico collated in the Dallas Fed's Energy Survey has improved but is still negative. Output has fallen for both oil and natural gas and the employment index is significantly down as firms continue to cut headcount. "We reached the bottom, and now we're trying to climb up. It will be quite a while to get back up the hole to the pre-Covid level of activity and service pricing," one insider says in the survey.

Like Perryman, Jankowski and the energy leaders in the report, Lattea also expects a longer recovery period, so he's preparing to pivot after 12 years in oil and gas. "I'm working on a business plan to try and increase efficiency in my industry and help these small inspection companies reduce their payroll. I can serve multiple companies and earn almost as much money as I was making before."

The oil price has rebounded to hover around $40 a barrel - high enough to cover the cost of existing wells but not yet high enough to dig new ones. In the meantime, the heart of America's oil country considers the prospect of virus-driven economic collapse.

Answer Questions:

1. Graph the market (supply & Demand) for the oil market (west Texas Crude)

2. Graph the firm (a firm) producing west Texas Crude.

3. Show on the two diagrams how events relating to COVID-19 lead to the shut down of many Texas oil production firms.

4. Be sure to label your graphs for the firm and market and show directional changes (similar to what you did on D1!)

5. Under what conditions would these oil producers start back up? Explain and show on an additional diagram

6. What are the characteristics of this market and why is it appropriate to represent the marketand the firm the way you did? Explain what you see and why you can graph these (market and firm) in the way that you did (I know, this is a re-statement of the first part)