Since the first major gusher of the Texas Oil Boom, Lucas at Spindletop on January 10, 1901 in Beaumont, Texas, the Texas oil industry has played a major role in the state’s economy. The newly discovered oil provided substantial financial gain to landowners and contributed to the general commerce of the state. Variations in oil prices impact the economic state of the whole industry, with businesses filling their pockets with cash when oil prices rise and struggling to cover expenses when prices fall. The Real Estate Center at Texas A&M University developed an econometric model of rural land prices that revealed a pattern of strong positive correlation between Texas oil prices and statewide and regional rural land prices.
Impact of Oil Prices on Land Prices
Land serves as a crucial factor in the production and distribution of goods and services. For owners focused on production of a commodity, land is a capital asset. In a competitive market, the price of land equals the present value of projected future streams of net revenues much like a company’s stock price equates to the present value of future dividend streams. Two major factors determine land prices, expected net revenues and the discount rate applied to those future cash flows.
Land prices are influenced by all factors that affect revenue streams. Higher oil prices mean more royalty incomes for owners of oil- and gas-producing land. Also, higher oil prices enhance the incomes of oil company shareholders and oil industry workers, contributing to an overall expansion of the economy. This added prosperity feeds money into the pockets of individuals who see the land as an asset capable of producing recreational experiences, advancement of the environment, or protecting a neighborhood lifestyle. It is reasonable to expect high oil prices would increase the price, as this type of buyer might pay more to pursue those activities. The competition among “recreational buyers” and commercial land users determines land prices. Therefore, fluctuation of oil prices can influence the results of bidding for rural land.
The Center’s time series of Texas rural land prices includes sales prices for land in seven distinct Texas regions plus a statewide time series of composite averages from 1966 to 2013. Regional prices are the average of median prices reported in particular size categories. The statewide price indicator consists of an average of those regional price indicators weighted by the proportion of total Texas acreage found in each region.
The price per barrel of West Texas intermediate crude oil, a grade of petroleum used as a benchmark in oil pricing, is shown from first quarter 1966 to fourth quarter 2013. There is strong and close parallel of the two price series after October 1973 (the Yom Kippur war) when the balance of power in global oil markets shifted in favor of countries in the Organization of the Petroleum Exporting Countries (OPEC). Both Texas oil prices and rural land prices show evidence of four distinct periods of correlation. Trends in Texas land prices have followed oil prices with lags of one to three years. Finally, Texas land price volatility has also been related to oil price volatility, especially in the aftermath of the U.S. economy’s recovery from the Great Recession.
In the first period, Texas oil prices and rural land prices embarked on an upward trend at the end of 1973. The rise in market prices for oil stalled in 1980, but Texas land prices continued their expansion until 1985. Regional differences in response to oil prices are discussed in the next section.
The continued upswing in Texas rural land prices from 1980 to 1985 despite falling oil prices resulted from exuberance on the part of rural land market participants, presumably based on expectations that oil prices would begin to increase again. Buyers from that period paid a high price for their optimism when land prices followed oil prices in a pronounced slide.
The second period, from 1985 to 2000, saw oil prices stagnate. Texas rural land prices followed suit.
The third period lasted from 2000 to 2008, when oil price markets experienced a steep upward trend, reaching an all-time high of more than $120 per barrel (quarterly average) in second quarter 2008. It was also a period of low interest rates implemented by the Federal Reserve in the aftermath of the 2001 recession and of credit availability resulting in the housing boom and bust of the Great Recession of 2008–09. Texas rural land markets experienced rapidly increasing prices after 2000 due to higher oil prices, lower interest rates and more credit availability.
The fourth period is the post-Great Recession era. Oil prices fell from record highs in 2008, then again trended upward, although remained increasingly volatile. Texas rural land markets currently appear to be following a similar path.
Rural Land Price, Oil Price Correlations
Oil prices are determined in international markets mainly by OPEC export policies. Texas rural land prices have no impact on oil prices. Correlations between rural land prices and Texas oil prices suggest the impact of oil prices on land prices either directly or indirectly through the impact of oil prices on Texas incomes.
This excerpt was adapted from article “Oil Prices Lead, Land Prices Follow” By Ali Anari and Charles E. Gilliland. View Full Article & Research: https://assets.recenter.tamu.edu/documents/articles/2077.pdf