If Low Oil Prices Persist, North Dakota Could Lose Billions

by | December 19, 2014

By Sarah Volpenhein

The state stands to lose billions in revenue if oil prices continue to slip, Lt. Gov. Drew Wrigley said Tuesday at a meeting of the Highway 2 West Manufacturers' Association in Grand Forks.

Under state law, if oil prices fall below a certain threshold for five consecutive months, the oil extraction tax disappears entirely for up to two years.

Wrigley said that would cause a "dramatic change in state revenue" and could potentially cause an exodus of oil rigs from the state and thus jobs. He reassured residents the state is built on a "very sound economic base" and that the state budget would balance.

"If we have to make some budget adjustments, we will," he said.

With oil prices taking a nosedive in the past several weeks, the price of oil is hovering just above the threshold, which is $52.06 for the 2014 year. The threshold will rise in 2015 by about 50 cents, Tax Commissioner Ryan Rauschenberger said in an interview.

West Texas Intermediate crude, against which that threshold is measured, fluctuated from around $54 per barrel to $57 per barrel throughout Tuesday.

But Rauschenberger said it is unlikely the price of oil will dip under that $52.06 threshold for five months in a row.

"That's a high standard," he said.

In recent years, the last time the price of oil fell below the threshold for an extended period of time was in 2009.

"The closest we came was the spring of 2009. We had been four solid months below the trigger price, and then in the fifth month, we went just above it," he said.

If oil prices were to remain below the threshold, or trigger, for two years, the state would then implement an oil extraction tax of 4 percent the value of the oil, which is 2.5 percent less than the current tax rate of 6.5 percent.

Wrigley blamed Organization of the Petroleum Exporting Countries, or OPEC, for plummeting oil prices, which has chosen not to decrease production in response to low prices.

Wrigley said some OPEC nations are "keeping it flowing" to force oil producers out of the market.

While OPEC is an important piece of the puzzle, said David Flynn, a UND professor of economics who focuses on the Bakken oil boom, there are other factors at play.

Since the relatively new technology of hydraulic fracturing, or fracking, gave drillers access to formerly inaccessible oil buried deep beneath the earth's surface within shale rock, the United States has become a more robust oil producer, thereby introducing more oil into the market. Flynn said car manufacturers and buyers have also shifted more toward fuel-efficient vehicles, thereby reducing the demand for oil in the country.

Whatever the cause of the decline, the loss of oil extraction tax revenue would put a damper on the economy, Wrigley said.

"At the end of the day, it's still very dependent on the price of commodities and oil prices," he said.

Wrigley called for a more diverse economy, pointing to Fargo-based technology start-ups and to manufacturers like Bobcat Company as prime examples.

"We need to remind people outside this country that we have opportunity not just because we found oil," he said.

(c)2014 the Grand Forks Herald (Grand Forks, N.D.)