MIDLAND, Texas—The traffic has returned to highways that months ago were quiet. Stores are opening in previously boarded-up buildings. Restaurants that were dead are bustling again with diners. In downtown Midland—the epicenter of U.S. oil production—an electric sign alternates between showing an American flag and the words: “It’s a great day to drill an oil well.”

Almost two years after the pandemic triggered one of the worst oil price crashes in history—and 12 months after the inauguration of a president championing a transition away from fossil fuels—the heart of America’s oil industry is pumping more than ever before. And there is newfound optimism about the future of the industry despite the area’s vulnerability to changing oil prices.

Midland and neighboring Odessa sit at the center of the world’s largest producing oilfield, the Permian Basin, a sprawling geological array of crude-bearing shale rocks that stretches across West Texas and eastern New Mexico, covering an area larger than Britain.

The Permian is the engine behind U.S. oil production and the driver of the shale revolution that transformed America into the world’s biggest producer. It accounts for roughly two out of every five barrels of crude pumped across the country and in December broke its pre-pandemic production record. In February it will churn out more than 5 million bbl/d for the first time.

Whether the prevailing optimism is wishful thinking or proves to be based on something more solid will have a massive impact on the roughly 300,000 combined population of Midland and Odessa, almost all of whom rely on the industry in some way even if they are not directly employed by it. It also has implications for President Joe Biden’s efforts to shift speedily away from fossil fuels, reinforcing how hard that could be.

“We all refer to ourselves as being in the oil business,” says Renee Earls, president of the Odessa Chamber of Commerce. “Regardless if you work at a fast-food restaurant, or if you work at the Chamber of Commerce or if you sell cars. We’re all in the oil business, because we’re all affected by it.”

Midland has traditionally been home to the white-collar operators of the Permian oil business, while Odessa, 20 miles down the road, is where the blue-collar oilfield services workers tend to be based.

When oil prices collapsed in April 2020, unemployment rose sharply in both Midland and Odessa, where it almost hit 16%. Oil companies idled rigs and laid off workers in their thousands. Bankruptcies soared. School attendance fell and the population slumped as people left town in search of work. Queues formed outside food banks.

The Permian Remains the Most Productive Oil Basin in the US - EIA Graph

Less than two years later, the picture is very different. “The Permian is the biggest moving piece in global oil supply,” says Bill Farren-Price, a director at the research firm Enverus, “and we see it roaring back in 2022.”

‘One foot on the brake’

In his office on the outskirts of Midland, Bruce Johnson is upbeat. During the pandemic, he was forced to lay off about two-thirds of his oilfield services company’s 30-strong staff. Now he has rehired most of those positions—and has ambitious plans for growth.

“It’s been a hell of a ride,” he says. “[But] just in the last six months, we’ve doubled in size. And we’re looking at doubling again over the next six months. Because business is there.”

The Permian Basin is no stranger to price crashes. But the latest one, in April 2020, was unprecedented in its scale and speed. Pandemic-driven shutdowns sapped demand just as a price war between Saudi Arabia and Russia flooded the market with crude. US oil prices plunged below zero for the first time.

Since then prices have steadily climbed as OPEC, the cartel of oil producing countries, cut production and lockdown restrictions eased: cars are back on the roads, planes are back in the sky and oil-guzzling big industry is humming again. West Texas Intermediate, the U.S. benchmark oil price, now sits above $85/bbl, its highest level in seven years—more than enough for production companies to turn the taps back on and make a chunky profit.

The 2020 Oil Crash Caused Unemployment to Soar in West Texas - US Bureau of Labor Statistics Graph

Yet the recovery has been a cautious one. Output may have surpassed pre-pandemic levels, but new drilling remains significantly lower than before and employment numbers have yet to regain their previous heights. Instead of coming from new wells, much of the production increase is from those drilled but not completed before the crash that are now operational.

“The silver lining,” says Ray Perryman, a local economist, “is that growth over the next few years is likely to be rapid as drilling activity is restored.”

Lori Merritt Blong, a Midland city councilor, ran an oil consultancy business before the pandemic. But when prices crashed she decided to offload her clients to a competitor and pivot into production. “In a low oil price environment, the first person that gets cut is the consultant,” she says. “The turmoil of that for us caused us to say we would like to have something we can build more stably.”

But business is not booming yet. “I would say that Midland has one foot on the gas and one foot on the brake,” she says. “There’s a hesitancy to ramp up [drilling] too far, too fast. And so there’s this check to the excitement that we’ve typically seen with oil prices well above $80.”

Much of that hesitancy is down to a new regime of capital discipline being imposed by Wall Street on the larger public companies. Investors—tired of losing money on a shale patch that seemed to prioritize output over profits—have quit the sector in droves in recent years, causing energy to slide from one of the biggest to one of the smallest sectors on the S&P 500.

Those investors that remain are demanding returns. No longer will they tolerate the profligacy of the past when it was all about drilling. As a result, production growth has to be gradual and any return of rigs to the field will take time—even with some analysts tipping crude prices to hit $100/bbl in 2022.

“Our investors have evolved,” says a senior executive at one large oil producer in the Permian. “They pushed for growth at all costs and now they get the new model—and they like it. They’re obviously pushing for it [because] it’s important to them.”

‘Will you remember that, Texas?’

During the final debate of the 2020 US presidential race Biden made plain his desire to lead a “transition” away from oil. “What he is saying,” responded his opponent Donald Trump, “is [that] he is going to destroy the oil industry.” Trump went on to ask: “Will you remember that, Texas?”

A year into Biden’s presidency the Texas oil industry is far from destroyed. But the surge in production in the Permian comes in spite of a marked political shift away from fossil fuels. Supporters of the president are few and far between in Midland and Odessa—which sit in Texas’s 11th congressional district, one of the country’s most conservative. Almost 80% of voters in the 11th district backed Trump’s failed bid to stay in the White House in 2020.

Biden campaigned on the most ambitious climate agenda in U.S. history, proposing a rapid shift away from fossil fuels that has massive implications for the oil industry, from drilling rigs to petrol pumps. Yet most of his efforts to curb the industry have, so far, come up short. A freeze on new leasing on public lands was overturned in the courts. A move to kill subsidies for the industry was gutted in Congress—as was a program that would have pushed utilities towards using more, greener power sources.

“None of that has happened,” says Amy Myers Jaffe, managing director of the Climate Policy Lab at Tufts University in Massachusetts. “This idea that this was the energy transition—I wish it were—but we haven’t started the energy transition yet.”

Instead, national output, led by the Permian, will hit record levels in 2023, according to the U.S. Energy Information Administration. Shale companies that were flirting with bankruptcy 18 months ago—when dozens went under—have never been more profitable, and are returning money to shareholders at an unprecedented rate.

As the world scrambles to contain the rise in temperatures driven by greenhouse gas emissions, the revival in the Permian Basin will be seen as a step in the wrong direction. Carbon dioxide emissions from the burning of fossil fuels are the main contributor to climate change.

Yet for many in West Texas—who feel demonized by some of the climate change rhetoric in the capital—a rapid and far-reaching shift away from oil was always impractical. Their industry, they say, is the foundation on which modern America was built and, they argue, it is here to stay.

Permian Basin Oil Production is at Record Levels - EIA Graph

“Oil is in the majority of products. It doesn’t have to be just the gas that you put in your car. I mean, almost every product in this room is made from, or is a byproduct of, oil,” says Earls at the Odessa Chamber. “So just use common sense and know that we can’t just end that today, or 12 months from now, or 18 months from now, depending on who is in the White House.”

In some parts of the country the prospect of a student starting a career in oil might raise eyebrows. But not in the Permian Basin.

At the University of Texas Permian Basin, the biggest college by student numbers in the area, enrolment in energy-focused courses has bounced back strongly after a drop during the pandemic. It is in the process of including additional oil-focused programs to its schedule.

“You won’t find bigger fans of the energy industry than this university and our college of engineering,” says Sandra Woodley, president of UTPB. “Our dependence on oil and gas, and our need for that to be a strong sector is not going to diminish any time soon.”

But she adds that diversification into areas such as advanced manufacturing, cyber security, health sciences and other forms of energy would leave the region less hostage to swings in the oil price.

“We expect there to be cycles,” she says. “And the goal of the university is to lessen those cycles by helping to diversify the economy and have other options that complement the oil and gas industry.”

Will OPEC end the Permian party?

The importance of the Permian is set to grow. As other basins struggle to keep production flat, or slip into decline, it is likely to be the only U.S. oilfield with rising production. Exotically named shale fields elsewhere in the country are widely considered to be waning: from North Dakota’s Bakken and Colorado’s Denver-Julesburg (D-J) Basin to the SCOOP/STACK in Oklahoma and the Powder River Basin in Montana. But in the Permian Basin the outlook is bright.

Scott Sheffield, CEO of Pioneer Natural Resources, the biggest operator in the Permian Basin, says that at elevated oil prices these basins could perhaps maintain production levels; but unless there is another crash the Permian will grow. “It’s pretty much accepted now,” he says. “On the oil side, it’s driven by the Permian.”

The data bear this out. Oil is cheaper to produce in the Permian Basin than just about anywhere else in the country, with companies able to profitably drill a new well in the Midland region when oil is at $46/bbl—roughly half current prices.

“I think there’s a runway here to continue that development for a considerable amount of time,” says Matt Mathis, head of operations at Pioneer. “[And] the Permian is uniquely positioned” due to its oil infrastructure and support industries.

Some of the biggest oil companies in the area have formed the Permian Strategic Partnership (PSP), which aims to make the region a more attractive destination. Schooling, healthcare and infrastructure in the area lag behind much of the state and country in terms of both availability and quality—a deterrent for executives asked to relocate from other parts of the country.

“My companies are putting their money where their mouth is,” says Tracee Bentley, PSP president. “They’re investing as if they are going to be here for 50 years.

“As far as production and activity, the Permian has a great, great future ahead of it,” she adds. “The world—and this country—is going to need the Permian for 50, 60, 70 years.”

Whatever its advantages domestically, Permian producers remain vulnerable to oil price decisions taken elsewhere. Companies like Pioneer are at the mercy of OPEC. Saudi Arabia and its allies could easily flood the market—as they have done before—reducing prices and wreaking havoc on the region.

“Investors know that OPEC has a bigger hammer,” says the senior Midland executive. “And they’ve used it on us in the past.”

That makes the future less than secure. “We have seen this movie before,” says Farren-Price at Enverus. “Permian producers are price takers and Saudi Arabia has both the spare capacity and the willingness to deploy it—that could bring any Permian party to a screeching halt.”