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Analysts Fear A Prolonged Drop In Oil Prices Will Hurt Oklahoma's Banks

Drilling rigs dot the landscape near Calumet, Okla., in April 2013. Oklahoma's economy blossomed during the domestic fracking boom, but as the price of crude oil drops, that could change.

In Oklahoma, a state that largely rode out the recession on a gusher of new-found oil, things may be about to change.

Now it costs more to produce most of Oklahoma's oil than it's worth on the world market. That's triggering a sharp economic reversal, one that some say has the makings of a prolonged downturn.

"Over the last five years, the stars really aligned," says Roy Williams, president of the Greater Oklahoma City Chamber of Commerce. "The community's investment in itself just blossomed, the energy industry blossomed."

Midsized oil companies based in Oklahoma City hit big in the domestic fracking boom. They uncorked a torrent of oil, flooding Oklahoma City with money and attracting new residents. Williams says low oil prices haven't changed that yet.

"There's going to be a lot of people who work on drilling rigs that are going to get laid off," he says. "That doesn't happen in downtown Oklahoma City, though. There's no drilling rigs in downtown Oklahoma City."

In Prague, Okla., a suburb of Oklahoma City, oil drilling rigs are parked in a row, idle because the company laid off all the people who used to run them.

"When you see a rig like that sitting in the yard, that just means that there's no longer demand to keep it in the field, and there's just not enough work out there for you," says Danny Morgan, who owns Morgan Well Service in Prague.

He says these rigs had been running round the clock, with 40 or 50 people working on each one. But all that new oil helped create a glut. Now Oklahoma wells cost more to put in than they're worth, and companies are cutting deep.

"But when they do that, it kicks a domino over that then continues to knock dominoes down for a extended area," Morgan says.

Some of those dominoes are hitting the Downtown Café in Prague, Okla. Christy Perry, the owner, says business has dropped by half.

"You know they're scared," Perry says. "Scared of spending their money because they're in fear of losing their jobs. It's just, everybody's getting laid off."

Steve Agee, the dean of the business school at Oklahoma City University and a former oil company executive, says unemployment rates in Oklahoma will probably go up as a result. He says he's seen this kind of thing before.

"I started in the business on July 6th, 1982, one day after the Penn Square Bank failed here in Oklahoma City," Agee says. Talk about kicking over a string of dominoes. Penn Square was the first of hundreds of oil-related bank failures in the 1980s, when an oil glut caused a sharp drop in prices.

"The severity of the drop in prices reminds me of the '80s, but the situation is completely different," Agee says.

Fred Russell, a financial adviser in Tulsa, Okla., agrees. "We're not cowboys, Indians and oil barons anymore," he says.

He says Oklahoma has found new ways of making money by entering the biotech, aviation, and business services industries.

"The pain of the last bust has led to an involuntary diversification of our economy," Russell says.

Banks have evolved since then, too. Dan Ellinor, chief operating officer of the Bank of Oklahoma, says regulations are stricter and lending practices are tighter. He says energy companies do hold about 20 percent of the money his bank has out on loan. This is a high percentage, and those companies are losing money fast, but Ellinor says he's not fretting, yet.

"No, we've been here before," he says. "So, not nervous right now, not at all."

Bankers say they had prepared for low oil prices.

Peter Ricchiuti, an economist at Tulane University, isn't so certain. "Well, we would hope that would be true. I hope there was something learned in the mid- to late-'80s, but I don't know if it is or not," he says.

He says most energy industry banks are not prepared for a year or more of cheap oil, and he predicts oil will stay cheap.

A bust that long would mean serious trouble for some American oil companies, the banks that finance them, and a lot of people in Oklahoma.

Copyright 2015 KCUR-FM. To see more, visit http://www.kcur.org/.

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