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Crude Economics
Oil Price Crash Sends North Dakota Reeling

Last December North Dakota’s oil production hit an all-time high, but output fell more than 3 percent last month as the state’s shale producers struggled to keep the good times rolling in the face of the recent plunge in global oil prices. As the WSJ reports, this price dip is making the first real dent in the extraordinary economic boom brought on by shale in North Dakota:

Bakken crude has always been expensive to produce and ship to refineries. When oil prices started to fall last year, Bakken oil producers slowed down spending. Fewer rigs actively drilling for crude-oil sources means less work for the roughnecks and truck drivers who service the new wells. […]

All this has cooled the hiring frenzy. Indeed, recently layoffs have begun in the Bakken oil patch, says Paul Stromme, a supervisor at a company that lays pipelines. Companies are “doing some culling,” he adds. “Now instead of taking anyone who walks through the door, they can be more choosy.”

We’re far from anything approaching a bust, but today’s bearish market is tempering what was once boundless enthusiasm for shale’s transformative powers in states fortunate enough to have the right kind of untapped reserves. Tax revenues from oil production dropped a whopping 40 percent from August of last year to January 2015 in Texas; North Dakota’s revenues fell 21 percent over the same time period.

But if you think oil-producing states here in America are struggling, think of how dire the situation is in nations that rely on oil revenues for the majority of their budgets. Petrostates like Venezuela and Iran are in a bad way, as is the rest of OPEC (not to mention sanctions-weary Russia). Here in the United States it’s private firms facing the brunt of the costs of cheap oil, and many of these producers are busy finding ways to still turn a profit by streamlining processes and maximizing efficiencies.

And of course, cheap oil is an economic boon if you’re buying rather than selling, so for the rest of America these bargain basement prices are a welcome change indeed.

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  • FriendlyGoat

    Having fifty separate states here, a few of which are very dependent upon oil revenues, is awkward for the whole of American oil policy.
    We’d probably be better off if all of our states were supporting themselves with taxes on net income and if taxes on oil/gas, if any, were at were at the federal level.

    • Andrew Allison

      There are precisely zero states which are very dependent upon oil revenue.

      • FriendlyGoat

        That would be news to the budget directors in Alaska, North Dakota, Texas, Oklahoma and New Mexico.

        • Andrew Allison

          As noted above, the impact on ND is of the order of one-half-of-1% of revenue. The most vulnerable state is Alaska, which doesn’t seen too concerned either:
, etc.

          • FriendlyGoat

            I still think that oil taxes, if any, would be better done at federal level so that our oil politics were unified. But that’s not going to happen, of course.

          • Boritz

            Agreed. Let oil czar Cheney convene a petro summit with the producers and work out a one size fits all plan for president Walker to implement by pen and phone. Anti-trust and environmental concerns? The AG will have other fish to fry.

          • f1b0nacc1

            In a different sort of oil, I hope…

          • FriendlyGoat

            President WHO? It ain’t over, you know.

          • Fred

            I don’t think Boritz is making a prediction, FG. I think he’s making the point that no party is ever likely to have a permanent majority. The Democrats you trust with the oil policy you favor will not always be in control of it. When the Republicans you despise and mistrust eventually come to power (and they will), they will control that policy. Better to have it run by states, where since the government is closer to the voters, it is more likely to be run by those more of the voters trust. In addition, states are more knowledgeable of and concerned with the exigencies of their own back yards. In a country the size of the U.S., one size very rarely fits all.

          • Dan

            why exactly do we need a “national oil policy”. I believe (and correct me if I’m wrong) that you are saying we don’t have one now. We seem to have gotten along just fine without one so far.

    • MartyH

      This encapsulates what I’ve said before about modern liberals: at heart, they are opposed to real diversity-diversity of thought, diversity of approaches to problem solving, the autonomy of the states. Instead, every minor inconvenience should get resolved at the Federal level.

      If oil prices go up or down there will be people, states, companies, and countries that are winners or losers. Same thing with corn, copper, gold, etc. Heck, even IPOs here in California contribute incredibly to these revenue swings. California government officials were drooling over the prospect of getting over $2 billion in revenue from the Facebook IPO:

      It’s funny how modern liberals say that there is is strength in diversity but every proposal they make in fact reduces it.

      • FriendlyGoat

        I’m not sure that states should be imposing separate and direct taxes on the extraction of oil and gas just because oil and gas sit in certain places with state lines drawn over the top. In the USA, it seems to me that we are a unified country which owns Alaskan oil just as much as Alaska residents do—–and Alaskans should likewise benefit from Facebook or taxes on earnings of any American company.

        As for “diversity”, it does not mean “states’ rights”. It means individual rights for all people, even though some are different from others in gender, race, religion, ethnicity, educational background and other factors.

        • Andrew Allison

          You are mistaken. First, there’s the inconvenient matter of States Rights (what’s left of them). Then, under US law, property owners, not the state in which the property happens to be and certainly not the Federal government, own the mineral rights to property which they own.

          • FriendlyGoat

            I did not mean to imply that private property owners do not own their mineral rights, or that the federal and state governments do not own mineral rights on land they respectively own. But some states have applied taxes on extraction from any of those places and it seems to me an odd thing for states to be able to do.

          • Andrew Allison

            “. . . it seems to me that we are a unified country which owns Alaskan oil just as much as Alaska residents do . . .” seems pretty clear to me. The mineral rights are owned by the landowners, private and public, who lease the extraction rights to production companies. Severance taxes are imposed on producers by the states when ANY non-renewable natural resources (minerals) are extracted within a taxing jurisdiction. Lessors and producers also pay state and local income tax. The argument for state imposition is that the infrastructure and environmental impacts of the extraction are local.

  • Andrew Allison

    North Dakota “reeling”? Get serious! A three percent decline in production, while unpleasant for participants in the shale Gold Rush, is hardly catastrophic to a State for which oil tax represents just 5.5% of its revenu ( Let’s keep a sense of proportion about the impact of low oil prices on producing States, as opposed to companies operating in them and those they employ.

    • Enemy Leopard

      To start, 5.5% of tax revenues is not trivial. But I’ll grant your point that a 21% decline in revenue from their oil tax is barely more than 1% of their total revenues, which on its own is not a huge deal. However, this calculation leaves out many other effects that the oil industry has on the state revenues. E.g., it’s likely that oil companies separately pay corporate income taxes, and their employees and contractors pay personal income taxes, property taxes, and sales taxes. The same is true for all of the workers who are indirectly supporting the oil industry. It would be a truly difficult undertaking to estimate the total impact that lower oil prices have on tax revenues or per capita income in the state, but I imagine it’s much greater than that 5.5% suggests.

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