Its oil wells idled and tax rev­enue plum­met­ing, North Dakota braces for a hard land­ing

Oil and gas went from 2 per­cent of the econ­omy to 16 per­cent “We never would have guessed it would get down to $28 a bar­rel”

Bloomberg Businessweek (Asia) - - CONTENTS - −Jen­nifer Old­ham and Matthew Philips

For most of the past decade, North Dakota has been the eco­nomic envy of ev­ery state in Amer­ica. It posted the low­est job­less rate, the high­est in­crease in per­sonal in­come, and the fastest-grow­ing pop­u­la­tion—all thanks to an his­toric oil boom that vaulted it past Alaska to be­come the coun­try’s se­cond-largest pro­ducer af­ter Texas. Now, amid the worst bust in a gen­er­a­tion, North Dakota’s econ­omy is shrink­ing, em­ploy­ment is fall­ing fast, and the state is im­pos­ing the deep­est spend­ing cuts in its his­tory to help plug a $1 bil­lion bud­get deficit. “Quite sim­ply, the North Dakota econ­omy has been dev­as­tated by the dra­matic drop in oil prices,” says Karl Kuyk­endall, an econ­o­mist at the mar­ket re­search and en­ergy con­sult­ing firm IHS.

With crude prices at 13-year lows, Repub­li­can Gov­er­nor Jack Dal­rym­ple on Feb. 1 or­dered 73 state agen­cies to make 4 per­cent across-the-board cuts. Patch­ing the deficit, which comes af­ter years of sur­pluses, will re­quire of­fi­cials to take $500 mil­lion out of a rainy-day fund, leav­ing it with only $75 mil­lion for emer­gen­cies. Dal­rym­ple is only the third gov­er­nor in the state’s 127-year his­tory to dip into the fund.

When state of­fi­cials were draft­ing their bud­get a year ago, they as­sumed oil prices would range from $47 to $53 a bar­rel, which they thought was suf­fi­ciently pes­simistic to cover them against fur­ther drops. They were not pes­simistic enough. “We never would have guessed it would get down to $28 a bar­rel,” says Pam Sharp, the state’s bud­get di­rec­tor.

De­spite the se­vere drop in prices, North Dakota’s oil pro­duc­tion has held up re­mark­ably well, fall­ing to 1.17 mil­lion bar­rels a day in Novem­ber from a peak of 1.23 mil­lion in De­cem­ber 2014, in part be­cause drillers have been able to re­duce the amount of money it costs to pro­duce each bar­rel.

Taxes on oil pro­duc­tion ac­count for only about 5 per­cent of to­tal state rev­enue, says David Flynn, chair of the eco­nom­ics and fi­nance depart­ment at the Univer­sity of North Dakota. The real money comes from sales tax rev­enue, the bulk of which is de­rived from the sale of equip­ment and ser­vices re­lated to frack­ing, says Sharp. With prices down, roughly 1,000 wells that have been drilled but not fracked are sit­ting idle, await­ing the mar­ket’s re­cov­ery. As a re­sult, the state’s sales tax rev­enue fell by a fourth dur­ing the third quar­ter of 2015 from the same pe­riod in 2014. “Sales tax rev­enue alone is down $700 mil­lion from the orig­i­nal fore­cast,” says Sharp.

Ac­cord­ing to data from the Bureau of Eco­nomic Anal­y­sis, North Dakota’s econ­omy shrank 10.4 per­cent in the first quar­ter of 2015 and 1.2 per­cent dur­ing the se­cond quar­ter. In 2004 oil and gas ac­tiv­ity rep­re­sented about 2 per­cent of the state’s econ­omy. By 2014, it was al­most 16 per­cent, ac­cord­ing to IHS’s Kuyk­endall.

Alaska, Texas, Louisiana, and Ok­la­homa are also reel­ing from stag­nant com­mod­ity prices, with lowerthan-ex­pected job and eco­nomic growth. In Alaska, Gov­er­nor Bill Walker is propos­ing six sep­a­rate tax in­creases on eco­nomic bul­warks such as en­ergy, fish­eries, and tourism, as well as the state’s first in­come tax in more than 30 years, to close a record $3.5 bil­lion deficit.

For some North Dakota res­i­dents, the bust comes as both a bless­ing and a curse. Jen­nifer Strange, who lives in Killdeer in the heart of the Bakken, laments that her fa­vorite coffee shop has re­cently closed. But the roads are bet­ter and no longer nearly as crowded. “So much oil money went to road im­prove­ments. That’s def­i­nitely a qual­ity-of-life im­prove­ment that will last be­yond the boom.”

The bot­tom line North Dakota has been los­ing jobs fast since the oil bust hit, leav­ing 1,000 wells idle and cre­at­ing a $1 bil­lion bud­get short­fall.

It’s a buyer’s mar­ket in Dick­in­son, N.D.

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