By David Wethe of Bloomberg. This article has some good points about how perfect competition works (more firms quickly entered when profits were seen), how labor markets work (high wages brought people into the labor force) and how substitute goods work (Texas sand is different from Wisconsin sand but cheaper). Excerpts:
"Standing high on top of a windswept dune in the West Texas plains, Greg
Edwards stares out into a vast ocean of sand. It stretches in every
direction, interrupted only by an occasional strip of asphalt or
clusters of silos that rise high into the sky.
Edwards runs a frack-sand mine. And those silos mark the presence of
his rivals, who suddenly seem to be popping up everywhere. As he turns
360 degrees under the blistering midday sun, he calls out their names
one by one: “Badger ... Atlas ... High Roller ... Alpine ... Black
Mountain ... Covia.”
Twelve months ago, none of them existed --
not even the mine owned by Edwards’s employer, Hi-Crush Partners. It was
the first of its kind here in West Texas. Day one was July 31, 2017.
Ten others immediately followed. And another 10 or so are now hustling
to get started.
Together, they will mine and ship some 22 million
tons of sand this year to shale drillers all around them in the Permian
Basin, the hottest oil patch on Earth. It is a staggering sum of sand,
equal to almost a quarter of total U.S. supply. And within a couple
years, industry experts say, the figure could climb to over 50 million
tons."
"And the price of sand was, well, zero. Today, it fetches $80 a ton, making this year’s haul alone worth about $2 billion."
"There is perhaps no industry that better captures the money-multiplying
effect of the Permian boom than the out-of-nowhere emergence of West
Texas as a rival to the original capital of U.S. frack-sand mining in
northwestern Wisconsin. With such explosive growth, of course, comes the
risk of over-expansion. The local miners are unmoved by such talk --
Hi-Crush CFO Laura Fulton actually laughed at the notion -- but to the
more dispassionate set of analysts and investors who watch the industry
from afar, it is a major risk even if the oil market continues to go
strong."
"All of these miners, with the exception of Emerge, now have
operations in West Texas. And they all have quarries back in Wisconsin
too. That state had quickly emerged as the epicenter of the sand market
when fracking
took off a decade ago. Large, rugged and round as marbles, the granules
found there are ideally shaped to prop open crevices in shale rock so
that the oil can seep out freely.
The West Texas sand isn’t nearly as big or as sturdy. And it’s oddly shaped too -- more like a jelly bean than a marble.
So
for years, it was ignored. (No one was even interested in it for use in
other industries, like cement or microchips.) But then, in the summer
of 2014, the price of oil plunged. Suddenly, cost-cutting was all the
rage. And there was no cheaper place to pump shale oil than in the
Permian.
As drillers piled into the region, they began to wonder
if they really needed to have sand shipped some 1,300 miles by rail from
Wisconsin when they had this inferior, but serviceable, stuff lying all
around them. Shipping costs from Wisconsin come to about $90 per ton of
sand. That’s triple the $25 or so it costs to truck in the Texas sand.
“The business plan is simple,” says Peter Allen, senior project manager at Black Mountain Sand. “We cut out the cost of railing it here.”"
"Like most everyone else here, [Sergo] Pando was lured to the sand mines by the
prospect of big pay. Even unskilled newbies can pull down $19 an hour,
almost triple the state’s $7.25-per-hour minimum wage. A student at
Texas Tech University, Pando took off the spring semester to start
working at Black Mountain. Six months into the job, he’s making $28 an
hour."
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