A Texas Oil Bubble Could Pop Due to Low Prices

Bryan Sheffield, a third-generation oil wildcatter in Texas’ Permian Basin, knows what he’ll do if crude drops to $80 a barrel: shut down half his drilling rigs and go on a takeover hunt for weaker rivals. He’s among producers who have invested $150 billion in the Permian since 2010, seeking a piece of a shale-oil trove estimated to be valued at as much as $5 trillion. As the money pours in, risks of a bust are mounting; some analysts forecast that crude is heading down to $70 a barrel next year.

The Permian lies beneath Texas and New Mexico and sprawls over 86,000 square miles, an area almost twice the size of Pennsylvania. While traditional wells have been drilled there since the 1920s, producers are giddy over the potential of the region’s vast overlapping layers of oil-soaked shale rock. Pioneer Natural Resources, an exploration and production company, estimates the remaining yield at the equivalent of 50 billion barrels, more than any field on earth except Saudi Arabia’s Ghawar. The varied geology, though, makes it costly to explore and develop. “That’s the double-edged sword,” says Benjamin Shattuck, an analyst at Wood Mackenzie in Houston. Multiple oil zones layered one atop another provide ample potential for riches, “but you also have to be a knowledgeable and good operator in order to drill economic wells out there.”