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At the Heart of Texas: Cities’ Industry Clusters Drive Growth


Midland–Odessa: Riding the Oil Booms, Seeking Fewer Busts

At a Glance

Midland–Odessa

Population (2014): 317,374
Population growth (2006–14): 26 percent
Median household income (2014): $68,215
National MSA rank (2014): Midland, No. 254*; Odessa, No. 265*
*The Midland–Odessa combined statistical area is composed of the Midland and Odessa metropolitan statistical areas (MSAs). The MSAs encompass Ector, Martin and Midland counties.

  • Midland and Odessa began as railroad towns and together evolved into a cattle shipping center and regional financial hub. The Permian Basin oil boom shifted the economic focus to energy.
  • After years of decline following the 1980s oil bust, the shale boom spurred economic growth, dominated by the energy industry but supported by manufacturing and transportation.
  • Household income grew faster in Midland–Odessa than in any other Texas metro in this report between 2006 and 2014.
  • The oil price bust will likely bring hardship to the area, but new investments in aerospace and alternative energy could buoy growth in the future.

HISTORY: Heart of the Permian Basin

Midland and Odessa are sister cities about 20 miles apart and are jointly promoted as “Two Cities, No Limits.” Like many other Texas communities, Midland and Odessa began as stations along a railroad—halfway points between Dallas and El Paso along the Texas and Pacific Railway. Early on, the area relied primarily on ranching. Midland became a prominent cattle-shipping center for Texas as well as a regional financial hub by 1890.[1]

The beginnings of the oil boom in the Permian Basin arrived in the 1920s. Scores of investors and oilfield workers moved to the area, and by 1929, 36 oil companies had established offices in Midland. Demand for oil and petrochemicals rose during World War II, helping transform Odessa into the world’s largest inland petrochemical complex.

From that point forward, the area’s economy was closely tied to the energy industry, rising with the oil booms and contracting with the busts. After years of decline that began with the 1980s oil bust, the Permian Basin and its economic center, Midland–Odessa, were regenerated by the recent shale oil boom.

INDUSTRY CLUSTERS: Energy-Driven Economy

The composition of industry clusters in Midland–Odessa is shown in Chart 7.1. It is organized by location quotient (LQ), a measure of a cluster’s share of local employment relative to its share nationally, and the change in employment share between 2006 and 2014.[2]

It's All About Energy in Midland-Odessa

Clusters in the “star” quadrant, such as mining and energy, have a large share of employment relative to the nation (an LQ far exceeding 1, in this case) and are fast growing. “Emerging” industries are relatively smaller than they are nationally (an LQ less than 1) but are fast growing. “Mature” sectors are more concentrated relative to the U.S. (an LQ exceeding 1) but are slower growing; “transitioning” clusters, such as government, are smaller relative to the nation and are slower growing.

The Midland–Odessa economy is overwhelmingly energy driven. A third of the workforce is employed by companies in the energy sector, and that cluster has experienced rapid growth. More than twice as many people worked for energy companies in Midland–Odessa in 2014 than in 2006.

Among the largest employers are Halliburton and Baker Hughes, oilfield services firms with a combined 3,000 employees in the two cities in 2014. A number of large and small energy production companies also have local offices.[3]

Midland–Odessa’s other important industries have grown in support of its outsized energy sector. Machinery and fabricated metal manufacturers such as Warren Equipment (with almost 600 workers in Midland) primarily make oilfield equipment. The construction industry is also particularly concentrated. The shale-led boom created demand for many large projects, including new office buildings, and single-family and multifamily residences.

The transportation and logistics cluster employs only 4 percent of the workforce but is the fastest-growing industry cluster in Midland–Odessa, its size nearly tripling since 2006 (Chart 7.2). Growth has been focused in truck transportation and pipeline transportation serving the oil and gas production industry. Additionally, the region remains an important midway point between El Paso and Dallas.

Employment Growth in Midland-Odessa Driven by Shale Boom

Driven by high-paying energy jobs, inflation-adjusted annual wages have grown significantly since 2006 (Table 7.1). The average worker in Midland–Odessa made one-third more in 2014 than in 2006 in real terms.

Table 7.1: Annual Earnings in Midland–Odessa Rise Steeply with Shale Oil Boom
Cluster Midland–Odessa   U.S.
  2006 2008 2010 2012 2014   2014
Mining and energy 76,627 83,014 84,235 87,067 93,264 76,815
Machinery manufacturing 67,181 67,898 68,230 70,535 79,774 66,715
Fabricated metal manufacturing 60,727 63,672 62,020 67,078 75,532 53,130
Construction 46,164 57,425 53,865 61,984 65,885 55,041
Chemicals 62,128 72,216 70,884 80,021 76,743 69,856
Transportation and logistics 55,157 57,141 57,814 64,002 67,772 51,043
 
Clusters with location quotient >1 67,634 74,933 74,929 79,463 85,441
Clusters with location quotient <1 36,857 39,231 40,370 43,391 45,478
Average earnings (total) 46,986 52,002 52,202 58,341 63,532 51,361
NOTES: Clusters are listed in order of location quotient (LQ); clusters shown are those with LQs greater than 1. Earnings are in 2014 dollars.
SOURCES: Texas Workforce Commission; Bureau of Labor Statistics; authors’ calculations.

Wages in industries with an LQ greater than 1 have driven the average up significantly; in 2014, workers in the most concentrated industries (star and mature clusters) made $85,000 annually on average, compared with $45,000 in less-concentrated industries. However, wage growth hasn’t been limited to more-concentrated sectors. Even in industries with LQs of less than 1, wages grew 23 percent between 2006 and 2014.

DEMOGRAPHICS: Income Rises, Poverty Declines

Employment and wage gains attributable to the shale boom have translated into explosive growth in household income in Midland–Odessa. Between 2006 and 2014, nominal median household income grew 59 percent, more than in any other Texas metro area (Chart 7.3). Median household income was $68,215 in 2014—more than $15,000 above the Texas median and the highest among the metros in this report. Midland–Odessa also has the lowest poverty rate among all the metros in the group, 8.9 percent.

Household Income Grows Explosively in Midland-Odessa

Despite relative economic success, Midland–Odessa trails the state in educational attainment. About 80 percent of residents age 25 or older are high school graduates—2 percentage points below the state average. Midland–Odessa also has the third-lowest share of population with a bachelor’s degree or higher, 21.4 percent, ahead of only McAllen and El Paso and more than 6 percentage points lower than the Texas average of 27.8 percent. This is likely because many oilfield jobs do not require a college education.

Midland–Odessa’s population is predominantly Hispanic (50 percent) and white (42 percent). The area’s importance as the heart of the Permian Basin has boosted domestic migration. From 2010 to 2014, domestic migration accounted for nearly 62 percent of the area’s population increase. While just 1 percent of the Texas population lives in Midland–Odessa, 4 percent of all domestic migrants to Texas moved to Midland or Odessa from 2010 to 2014.[4]

EMPLOYMENT: A Tale of Boom and Bust

Before the shale oil boom, Midland–Odessa was hit hard by the Great Recession, losing more jobs as a share of total employment than any other Texas metro. Between October 2008 and August 2009, employment fell nearly 10 percent. The area’s economy has long been tied to oil prices, and the nearly 77 percent decline in the price of West Texas Intermediate (WTI) crude that accompanied the Great Recession severely affected employment—even more profoundly than in Houston, with its more diverse industry mix. However, Midland–Odessa, like Houston, benefited from the tailwind of the shale boom following the Great Recession.

Employment climbed back to prerecession levels by March 2011 and grew at a far faster pace than in other major Texas metros—42 percent between December 2009 and December 2014, or 7.2 percent per year, and 1.8 times faster than in postrecession Austin (4 percent per year over the same period).

After every oil boom comes an oil bust. With WTI prices in November 2015 at 62 percent below their 2014 peak, Midland–Odessa lost 3,800 jobs in the first 11 months of 2015, a 2.3 percent annualized rate of decline.[5] Of the two cities, low oil prices have hit Odessa the hardest. The unemployment rate has increased faster in Odessa than Midland. Despite Odessa’s smaller workforce, it accounts for 50 percent of jobs lost in the area since December 2014.

OUTLOOK: New Industry Holds Promise

The oil price collapse poses a major challenge for Midland–Odessa’s economy, with the energy industry accounting for a third of the area’s employment and nearly half of total wages earned in 2014. Overall employment has already begun to decline, and a new push in the energy industry to cut costs may diminish wage growth. The shale boom drove up demand for housing and commercial development; the bust will impact construction and real estate along with manufacturing and transportation.

Despite the seeming pervasiveness of commodity market weakness, the downturn is unlikely to be permanent. The Permian Basin has a long history of ups and downs—drilling and extraction have occurred for more than 90 years—and the industry will eventually recover as prices rebound. Area reserves could likely sustain drilling for another half-century or more.[6] The area also has the potential to produce alternative energy sources, such as wind power. The Permian Basin is home to 11 wind farms, with more such projects planned.[7]

Midland is also attempting to diversify its economic base. The Federal Aviation Administration has granted the Midland International Air and Space Port a commercial space launch site license, making it the first commercial airport in the U.S. designated as a spaceport.[8] Aerospace research and development firm XCOR Aerospace and aerospace equipment manufacturer Orbital Outfitters have indicated interest in the area, and plans for a spaceport business park could potentially draw additional related firms, building a new industry that could bring future employment and economic growth.

Midland–Odessa Growth Outlook
Drivers Challenges
  • A commercial spaceport may draw aerospace research and development and high-tech manufacturing companies to the area.
  • A long history of drilling in the Permian Basin suggests that the industry will eventually recover along with prices and that production will grow again.
  • Investments in alternative energy could help damp the impact of future oil price busts.
  • Transportation and distribution industries will continue to grow as Midland–Odessa remains an important midway point between Dallas and El Paso.
  • Low oil prices threaten to slow or reverse growth in energy and related manufacturing and services industries.
  • The energy-related job base will contract as rig counts decline.
  • Industry cost cutting may halt wage growth.
  • A recent real estate boom driven by energy industry expansion may turn to bust and result in increased vacancies in single-family, multifamily and commercial properties.

Notes

  1. The histories of Midland and Odessa are adapted from the Texas State Historical Association online at tshaonline.org/handbook/online/articles/hdm03 and tshaonline.org/handbook/online/articles/hdo01.
  2. The percentage shares of each cluster do not add to 100 because some industries are counted in multiple clusters and some industries are not counted at all based on cluster definitions. (See the Appendix for more information.)
  3. Detail regarding Midland and Odessa’s top employers was compiled from several local websites: www.midlandtexas.gov/ArchiveCenter/ViewFile/Item/182, odessatex.com/major-employers and www.midlandtxchamber.com/allcategories.
  4. The estimates are based on the 2010 census and reflect changes to the April 1, 2010, population due to the Count Question Resolution program and geographic program revisions.
  5. Data are from the Texas Workforce Commission and have been seasonally adjusted by the Federal Reserve Bank of Dallas.
  6. Data are from the Odessa Chamber of Commerce presentation on Odessa economic development, May 2014, odessatex.com.
  7. The city of Midland partnered with Texas Tech University to invest in the National Institute for Renewable Energy, which will research issues for the wind-power industry.
  8. The Midland commercial spaceport development detail is from the Midland Development Corp. website, midlandtxedc.com/commercial- spaceport-development.
At the Heart of Texas