Dear Eric,

I am a reporter for a German national daily newspaper (DIE WELT; www.welt.de) based in Washingtron, D.C. and I just came across your comment of Oct. 2004 "The Magic 50"; I was fascinated by it because I am in the process to research, a year later, if there is any evidence of a new oil boom "new benzes in the school´s parking lot") anywhere in texas, preferably in Midland. I have been quite unsuccessful so far, to my surprise. - I know Midland, Tx a little bit from a visit in spring of 2004 doing the Bush hometown story. - My question, if you would kindly take the time to consider it: Do you see any indication that the oil price, still hovering around dream heights, is about to create the next boom - this time, and that´s my emphasis, possibly pitting profiteurs from even small wells against almost everybody bleeding dollars at the gas pump and soon paying heating bills?

Thank you, sincerely,
Uwe Schmitt
Senior National Correspondent

Hello, Uwe...it's good to hear from you.

Your questions deal with complex issues and I'm not necessarily qualified to give you an authoritative answer based on economic theory and the psychology of perceived windfall wealth. But I'll be happy to share some observations from life around Midland and the Permian Basin as they relate to the run-up in oil and natural gas prices.

First, the overtly ostentatious signs of newly-acquired wealth that accompanied the boom in the early 80s is noticeably absent this time around. Instead of Rolls-Royces and Lamborghinis, we're seeing Hummers and Escalades. New car sales in the area have been extremely strong, giving some evidence that perceived prosperity is occurring all through the economic scale, not just at the very top.

Also, new home sales are hitting record levels and new home construction is very strong as well. While you can see this phenomenon across the US, Midland has never really tracked the same ebb and flow in real estate markets until now. And most of the new home construction is in the $200,000+ range, which buys a LOT of house in west Texas (3,500+ square feet, 3 and 4 car garages, etc.)

There are less visible signs of increased wealth. I'm told that the financial advisor business is booming as people try to figure out what to do with their new money, and people are attending seminars in philanthropy. Our local foundations are seeing healthy inflows of money to establish new charitable funds.

Not everything is 100% rosy, however. Focusing only on the oil and gas prices gives just one side of the story. Operating costs in the oilfield have also skyrocketed, as labor and material shortages have driven up prices. Ironically, the same high oil prices that help the oil companies also hurt them as those prices drive up the transportation costs for supplies and equipment.

Those shortages have another ironic effect: the hunt for new oil and gas supplies is not being carried out as effectively as it should be because companies cannot secure enough drilling rigs or trained crews to operate them. Some drilling rigs have a waiting list of more than a year. (Most people may not realize that very few onshore oil and gas producers do not own their own drilling rigs; they lease them from drilling contractors, along with the crews to operate them.)

Also, the rebuilding of the Gulf Coast region after the hurricanes is siphoning off materials and supplies (especially steel) that is needed for oilfield operation and expansion. So, when we see politicians starting to cry for a "windfall profits tax" on oil companies, and we see that those proposals are really tied to the price of crude oil instead of actual profits, we see that as proof that those politicians really have no basic understanding of business...or they just don't care.

Another sign that the higher prices aren't necessarily making a huge difference locally is that our local United Way campaign fell short of its fundraising goal this year. The goal was $3.25 million and we missed it by more than $100,000. That may not sound like a lot, but it's very rare that the United Way misses its goal in Midland. (Some of this is probably due to "contribution burnout," again following the hurricane disasters in the Gulf Coast, when so many people gave money for relief efforts.)

High prices are also a mixed blessing for smaller oil and gas companies in that they drive up the price of producing properties and drilling prospects. Those small companies are the heart and soul of the oil industry around Midland and the Permian Basin. They take the smaller, less-profitable producing properties and nurse them along. But many of those properties are now priced out of reach.

You refer to prices hovering around "dream heights," but I don't believe that's technically correct. On an inflation adjusted basis, we're still significantly below previous high prices. That's not just an economic technicality, either, just as a windfall profit tax based on revenue instead of actual profits isn't insignificant.

But, I understand the perception of the public when it sees the relatively high gasoline prices and high electric bills in the summer and high gas bills in the winter. At those times, people tend to not care about inflation factors and profit margins, etc.

Overall, my perception is that the high oil and gas prices are giving Midland a definite lift, but it may be more psychological than anything else. Our gasoline prices are just as high (or higher, in fact) as anywhere else, as will our heating bills be this winter. My electric bill during the hottest part of this summer was the highest by 25% I've ever experienced. Most producers I know don't expect the prices to stay as high as they are today so they're "keeping their powder dry" for the eventual downtown, investing in solid projects, doing equipment upgrades and improvements and looking out for good opportunities where they can put some of the additional revenue to good use. In other words, they're being good businessmen...not "profiteurs."

I don't know if any of the preceding is remotely interesting or informative. If you'd like a more expert opinion on things, I can put you in contact with the Executive Vice President of the Permian Basin Petroleum Association.

Please let me know if you have any questions.

Eric