Texas A&M University’s Real Estate Center released an econometric model positing a powerful correlation and interdependence between rural land prices and Texas oil prices. For most landowners, their land is arguably their most valuable possession. Land is also a vital ingredient for the oil industry. In addition, the oil industry is highly competitive in terms of offers to lease mineral rights and make use of the surface. The price of one’s land can be calculated from the value of projected future revenue the landowner receives from an oil company.
Land prices are determined by two factors: expected net revenue and the discount rate applied to future cash flows. The higher the price of oil, the greater the revenue from bonus and royalty income will be for oil and gas producing land. The increase in oil prices also effects oil company workers, shareholders, and executives in the form of increased salaries, bonuses and share prices. With more to spend, the workers and shareholders can pay more for land and so this helps bid up land prices as well.
The Real Estate Center’s model includes data from 1966 to 2013 tracking the price of oil and the price of rural land. The researchers found a seemingly direct relationship in four time periods. First, from 1973 to 1980, as the price per barrel of crude oil increased, so did the cost of rural land. The second period occurred between 1985 and 2000. Oil prices were stagnant, and so were the land prices. The period of 2000 to 2008 brought an upward movement in oil prices. During this third period, crude oil prices reached a high of more than $120 per barrel. Similarly, the rural land market experienced an increase in prices. The fourth period is after 2008. Oil prices dropped dramatically, but bounced back rather quickly. Once again, land prices followed suit.
The Center found the speed in which the land prices followed the trend of oil prices were contingent upon where in Texas the land was located. In Regions 1 and 5, the effect of oil prices on land prices happen more quickly. (Region 1 contains Midland and Ector Counties as well as other counties that are heavily involved in oil production.
The Real Estate Center’s econometric model is updated quarterly. The model may prove to be a useful tool for real estate investors who are trying to get into the market before the next boom in land prices.