The Fuse

North Dakota’s Economy Looks to Escape Oil’s Boom-Bust Cycles

by Matt Piotrowski | July 12, 2017

The shale boom’s effects on the U.S. economy are difficult to overstate. With the introduction of hydraulic fracturing, the oil sector in producer states has become a large employer, lower gasoline prices have given motorists a stimulus, and net imports of petroleum have been cut in half. But even with these benefits, the positive impact has been uneven. States that rely heavily on the oil industry became victims of their own success. The oil price downturn of 2014-16, spurred by OPEC allowing the market to crash with its overproduction, caused a large number of layoffs throughout oil-producing states, while lower tax revenues undercut their budgets. Right now, after the industry came back from the brink during the first half of 2017, oil prices are lingering in the $40 range, reinforcing the understanding that prices will remain “lower for longer.”

Against this backdrop, oil-producing areas have to contend with austerity measures, increased price volatility, and an uncertain outlook. The market may never return to its previous boom times, so state governments and the multi-billion industry as a whole have to wade prudently through this new reality.

Oil-producing areas have to contend with austerity measures, increased price volatility, and an uncertain outlook. The market may never return to its previous boom times, so state governments and the multi-billion industry as a whole have to wade prudently through this new reality.

North Dakota is the one state that gained special prominence during the shale boom. North Dakota saw the sharpest production growth, rising ten-fold from just 98,000 barrels per day in 2005 to over 1 million barrels per day one decade later, making the state’s economy increasingly reliant on the oil industry. With that accelerated output growth, the labor market became blistering hot. And the influx of oil revenue had a massive multiplier effect, boosting all sectors of the state’s economy. North Dakota was in an exceptional situation after the financial crisis of 2008-9. In the Williston area, the main center of oil activity, the number of jobs soared from about 12,000 in 2010 to 32,000 by the end of 2014—at a time the rest of the country was recovering from a global recession.

Sales tax revenues undermined

But the state was not shock-proof. “North Dakota has fared as well as anywhere else that’s producing oil, even though there have been a lot of bumps along the way,” David Flynn, professor of economics and finance at University of North Dakota, told The Fuse.

Since oil prices fell in 2014, the number of total jobs in the Williston area declined by a third, and transient workers who were laid off left the state. Most of them had resided at “crew camps” and didn’t move to North Dakota permanently. As a result of those workers losing their jobs and fleeing the Bakken area, North Dakota has had to contend with declining revenues from the sales tax. On top of that major setback, the state has to deal with a loss of windfalls from production and extraction taxes, since companies lowered production for a while and prices are well below the $100 seen from 2011-14.

“In the last 18 months, we’ve had to reduce revenue forecasts four times, with most of the focus on the sales tax.”

“In the last 18 months, we’ve had to reduce revenue forecasts four times, with most of the focus on the sales tax,” Ryan Rauschenberger, Tax Commissioner of North Dakota, told The Fuse. He explained that when prices crashed and the number of rigs plummeted, there was “no determinable trendline” to determine tax revenues and the outlook for the budget.

In a reflection of how badly the state budget has been hurt by the price downturn, for the second half of 2015 when prices took a nosedive, total tax revenue came in some $215 million less than forecast. In 2016, the state was hit particularly hard. Sales tax revenue doubled from 2011 through 2015, but fell by $400 million in 2016. Meanwhile, oil extraction tax and production revenues peaked in 2014 at $3.3 billion, but was a massive $1.7 billion lower last year.

NorthDakotatax

Beyond the hole created in the state budget, there was also the personal toll of the downturn, as lives were upended by the spectacular crash in prices. Although most workers who were laid off left the state, local businesses still took major hits. “We’re about right on the edge of losing everything … We’re trying to literally hang on to any possibility of this coming back,” an owner of a small oilfield services company told The Atlantic last year. “Those who relocated to the western part of the state to restart their lives have been particularly hurt,” said Flynn. The areas built up around the oil activity are still searching for a longer-run equilibrium. Schools, medical facilities, and the housing market were expanded during the oil boom, but now they are underutilized as there has been net migration out of the area.

The state has seen its fortunes turn around this year. For instance, the North Dakota’s unemployment rate has fallen to an astonishing low 2.5 percent, after rising as high as 3.3 percent during the first half of 2016.

The industry has put in place efficiency measures to do more with less workers. Production has rebounded back above 1 million barrels per day after declining below that level late last year. For the entire state, the number of active rigs is now 57, up by 26 compared to this time last year. Better fortunes for the industry are seeping into other sectors, boosting activity for the likes of the services sector and truck drivers.

“It’s not as busy as it was in 2012, but there’s still a lot of machinery moving in the oil patch,” said Rauschenberger.

The large inventory of drilled but uncompleted wells (DUCs) will provide a huge boon to North Dakota’s coffers. Rauschenberger referred to them as a “savings account for the state.” When they are finally completed, they will provide revenue through both the state oil tax and the sales tax.

The state is “labor constrained,” as industry is scrambling to find new workers as completions increase and activity remains robust.

Most in-state workers who lost their jobs transitioned to other industries, while the oil sector’s improved efficiency and ability to do more with less equipment has reduced the number of employees needed. But with the rebound, there are large number of job openings. In fact, the state is “labor constrained,” said Flynn, as industry is scrambling to find new workers as completions increase and activity remains robust. Throughout the state, which has a population of 750,000, there are roughly 13,000 openings for jobs (inside and outside the oil patch), at a time of already high employment.

Large contraction in state budget

Still, the loss of sales tax revenue has brought about a string of across-the-board budget cuts, prompting some state workers to get laid off. North Dakota has to, by law, balance its budget, forcing austerity measures. The state also has a legacy fund, which was set up in 2010 for times of emergency. As of now, the government has balanced its budget without tapping the principal of the fund, which takes in 30 percent of all oil and gas production and extraction tax revenue.

Despite the difficult times, North Dakota is in some ways better off than other oil-producing states such as Oklahoma and Louisiana.

Despite the difficult times, North Dakota is in some ways better off than other oil-producing states such as Oklahoma and Louisiana. Unlike other states, many of the workers who lost their jobs in North Dakota were from outside the state to begin with, a situation that wasn’t the case in the others. Both have unemployment rates higher than the national average, and Oklahoma’s deepening budget cuts have forced 4-day weeks for many of the state’s public school students. Alaska, meanwhile, has longer-term capital-intensive projects and can’t rely on short-cycle shale plays. Texas is the largest oil-producer state, but holds an advantage over North Dakota and others in that its economy is diverse with a number of large metropolitan areas and oil and gas tax revenues making up a smaller portion of the budget.

‘A new normal’

Even though North Dakota is a giant oil state and still commands one of the strongest labor markets in the U.S., it has diversified through infrastructure projects and bringing in more big-named companies like Northrop Grumman, Bobcat, Caterpillar Remanufacturing, and Microsoft. Nevertheless, the state’s fortunes will be highly dependent on production levels and the oil price. The two-year budget for 2017-19 assumes a price forecast of $47.50 per barrel and output of around 925,000-950,000 b/d, a reflection of sober expectations. “We’re establishing a new normal,” said Rauschenberger. “We’re preparing for the market to remain in the upper $40s and low $50s. Shale has the ability to react quickly, so it’s important that when prices do rise, we don’t lose market share to [OPEC] countries.”

“We’re establishing a new normal. We’re preparing for the market to remain in the upper $40s and low $50s. Shale has the ability to react quickly, so it’s important that when prices do rise, we don’t lose market share to [OPEC] countries.”

Fixing the budget issues will require the North Dakota to live within its means knowing boom times may not come back for a while, if at all. The state will need to manage its resources and finances prudently to keep as much damage from price volatility at bay and develop longer-term sustainable growth through deeper economic diversification. “You can’t make budget adjustments and cuts and not see some continued fallout,” said Flynn. “I don’t think we’ll see the incredible leap into the oil sector as we saw before. The state has gone through an up-and-down cycle and everyone will remain cautious.”

 

 

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