2016: Oil, gas and ag busts hurt rural Kansas
The sheer number of mud-spattered pickup trucks says a lot about what people here do all day.
For a century, the people of this central Kansas town have built a life around the up-and-down businesses of oil and farming.
These days, that’s not a happy thing.
Russell, like most of rural Kansas, is in recession. Plunging oil, gas and agriculture prices have forced businesses to lay off and families to cut back.
This is the start of the second year of a downturn following nearly a decade of bounty in oil and ag country, and people, employers and governments are trying to figure out just how deeply they need to hunker down.
People are studying 2016 forecasts for oil prices and crop prices — and hoping for a change before things get desperate and temporary cutbacks have to be made permanent.
Those who live in the state’s more populous, more prosperous cities may have missed the rural economic downturn. Relatively few Kansans live in the countryside anymore. The number of people tied directly to farming is small, and the number in oil and gas production is even smaller. The state as a whole is growing, and jobs are increasing.
But starting around Hutchinson and heading south and west, property valuations and retail sales have fallen enough to cause many county tax bases to contract. Some have shrunk by a third.
In those counties, households, businesses and government have cut back on spending. That has meant a closed drilling pipe plant, a sold Harley-Davidson, a 10 percent cut in a government budget, a visit to the food pantry.
How broad, how deep
State officials point to the oil, gas and agriculture downturns to help explain why state government is facing a huge budget hole despite a relatively robust state economy.
According to the Kansas Department of Revenue, the oil and gas plunge has shaved nearly $1 billion off the $32.3 billion worth of assessed valuation statewide, pushing 40 counties into negative territory and cutting growth in most of the rest.
The oil and gas plunge has shaved nearly $1 billion off the $32.3 billion worth of assessed valuation statewide.
It certainly cut growth in the value of taxable property in 2015, trimming what might have been a 5 percent increase for the state, had oil stayed the same, to 1.74 percent.
Oil and gas leases are considered commercial property, just like a grocery store, and are taxed based on their market value. The market value is a function of how much income it is expected to generate. As the expected income falls, the market value falls, and the taxes based on it fall.
Oil and gas are also subject to the severance tax, based on the actual amount of production.
And the loss of wealth from falling oil and gas production can be seen by falling retail sales in the big oil and gas counties.
That steep drop in property valuations and sales tax largely reflects the loss of the value of the produced oil and gas, rather than any kind of broad-based plunge in property values or sales. But it clearly points to a dramatic drop in the wealth generated in those communities.
It’s a key problem for the cities, counties and school districts in those areas and, to a lesser extent, the state.
“It’s significant,” Nick Jordan, Kansas Secretary of Revenue, said of the oil bust and, to a lesser extent, the ag downturn. “If we focus on the sales tax receipts, income tax is going up because of the unemployment rate of 3.9 percent, but the sales tax has struggled since March.”
Haskell County, south of Garden City in the southwest part of the state, saw its property valuation drop by almost 40 percent. It saw its sales tax collections fall by 32 percent. Ness County, east of Garden City, saw its valuation fall 33 percent and its sales tax collections fall 34 percent.
Even in Ellis County, home of Hays, and one of the biggest and most diversified counties in western Kansas, the assessed value of taxable property fell 12.5 percent. It has meant budget cuts and tax increases.
And that loss of oil wealth and oil jobs will overflow into the broader economy.
Haskell County saw its property valuation drop by almost 40 percent and sales tax collections fall by 32 percent.
“Employees who were getting 70 hours and now they’re getting 20, they’re not going to buy a $40,000 pickup. That’s all going to shut off,” said Ellis County Commissioner Dean Haselhorst, a farmer and oilfield worker.
Farmers haven’t seen the bust that the oil patch has, but agriculture is an even larger part of the Kansas economy.
Crop farmers have enjoyed six years of high commodity prices, and cattle farmers a couple of years. It was a chance to reinvest in the farm, buy more land and, maybe, take a nice vacation. But that ended a year or two ago with plunging global prices, so even in counties with little oil or gas, there has been a drop.
“If you talk to any implement dealer today, they have been selling next to nothing,” said David Clawson, a rancher and farmer in Clark County.
‘Quite a drop’
Russell is small, 4,500 people, but it seems bigger out on the prairie by itself.
Anyone who travels on I-70 west of Salina has passed Russell. It has the usual assortment of restaurants, motels, convenience stores and repair shops clustered around the off-ramp.
A mural downtown shows some of its most famous citizens, Bob Dole and the late Pennsylvania Sen. Arlen Specter. For a time in 1996, the town enjoyed a unique celebrity when both were in the race for the Republican presidential nomination.
It’s also known as one of Kansas’ biggest oil-producing counties because it sits on top of the Central Uplift formation. A year ago, the farm fields of Russell County were littered with bobbing pump jacks. In 2014, drillers pumped nearly 2 million barrels of oil out of Russell County.
Tim Scheck is the long-time owner of Scheck Oil, which includes companies that drill for oil, operate the wells and provide a variety of well services.
It’s pretty quiet these days at his office on Front Street.
He said that as late as December 2014 the company moved four or five rigs a week, at $15,000 per move. Last year, it assisted with a few rig moves, generating $7,000 – for the entire year.
“That’s quite a drop in revenue,” Scheck said, dryly.
Those in the industry who borrowed a lot of money are long gone, he said. Only the most conservative players are still operating.
If a pump is already set up and pulling oil out of the ground, the cost of bringing up a barrel of oil is $15 to $25 in Kansas, he said. The price for that oil, called Kansas Common crude, has mostly been around $20. In other words, producers may break even if absolutely no other costs are incurred.
Those who are still producing oil watch expenses like a hawk and may still be losing money, he said.
“There are a few people holding on, but it will come to a point where it depends on how far they want to go in the hole,” he said.
On the main east-west drag through town, Wichita Street, there is a long series of metal and brick buildings belonging to the city’s oil services industry.
Some have pickups parked in front, but some parking lots are empty and the buildings locked. Here and there are “for sale” signs. Lots of pump jacks and oil pipes are stacked up.
Kevin Karst may have some of the trucks missing from those businesses.
The owner of Karst Kustom and Sales on Wichita Street buys, fixes and sells vehicles, especially trucks. He sold a lot of trucks to the oil industry when it was booming, and now he’s buying some of them back at a discount. They still command good prices if they are sold beyond the area.
A lot of guys overspent.
Kevin Karst, owner of Karst Kustom and Sales
He’s bought back a few of the “showboater toys,” $50,000 or $60,000 tricked-out pickups that oil workers bought when they were flush with overtime cash.
“A lot of guys overspent,” he said. “I had a guy I knew come in, he was about 60. I thought he had money. But he came in and was selling his truck, his boat. His RV just got repossessed.”
No basket case
While there may be a depression in the oil industry, it’s only a recession for the community of Russell.
The big White Energy plant on the northeast edge of town continues to produce ethanol and wheat gluten. There are schools, a medical clinic, insurance agents and restaurants. Travelers will continue to drive by on I-70. Hays continues to offer the chance of employment 30 miles to the west. Retirees continue to receive Social Security checks and Medicare.
The number of people out of work has risen slightly from a year ago, according to state figures, but the county’s latest unemployment rate is 3.6 percent.
Cathy Berry, administrator for the Russell County Food Pantry, said demand for food has risen from 63 families in the county to 78, while donations have fallen.
And the oil bust so far has had little impact on real estate: maybe a dip in home prices, but no increase in the number of people selling out, said Kendra Trueblood of About You Realty.
But it’s clear that the local economy has slowed considerably. It takes time for the loss to work its way through an economy, and oil and commodity prices may rebound before more damage is done to non-oil parts of the economy.
We don’t know any other way than to live through it.
Jenae Talbott, Russell County Economic Development and Convention and Visitors Bureau
There’s nothing to do but hunker down and wait, said Jenae Talbott, executive director of the Russell County Economic Development and Convention and Visitors Bureau.
“We don’t know any other way than to live through it,” she said.
Slipping in the oil patch
Here are the 10 Kansas counties with the steepest decline in sales tax collections:
% change in 2015 vs. 2014
Source: Kansas Dept. of Revenue