Should North Dakotans Be Worried About Falling Oil Prices?
Yesterday I posted about another round of starting numbers for growth in North Dakota tax revenues. Growth which, we all know, is being driven primarily by the state’s oil boom. Absent the driving force of the oil boom, and given the state’s dramatic increase in spending (more than doubling over the last decade), if this revenue growth were to drop off the state would quickly find itself in a fiscal mess.
Which is no doubt why, in the Bismarck Tribune report about the numbers, some legislators who were being presented the figures wondered about falling oil prices:
Committee Chairman Jeff Delzer, R-Underwood, brought up the issue of Bakken crude oil prices. He said the benchmark price for West Texas Intermediate crude is at about $85 per barrel. He said Bakken crude, which historically has been sold at a discounted rate, is at about $67 per barrel.
“That is something we need to be aware of,” Delzer said.
Keller was asked by Rep. David Rust, R-Tioga, why the discounted rate is so wide.
“I know in the past it’s been because of cost of transportation,” Keller said.
Delzer said although production is higher than projected, oil prices have decreased in recent months. He said prices are something legislators should keep an eye on.
Bakken oil does sell at a heavy discount because of transportation challenges (something delays in building the Keystone XL pipeline aren’t helping). So how low do oil prices need to get before we worry? It’s hard to say. This chart from the International Energy Agency (IEA) indicates that nationally oil prices would have to fall below $44/barrel before Bakken oil fell below the “break even point” for production:
That’s reassuring as currently oil prices nationally are at $85/barrel, though down $0.81/barrel yesterday. But there may be cause for some concern based on the commentary which goes with that chart.
“Rystad Energy energy analysis shows that around 85% of the cumulative production is economic as long as realized Bakken oil prices stay above $60/bbl,” reports the IEA.
Right now Bakken oil prices are at $67/barrel. If those prices fall by $7/barrel, we reach the point at which 85% of the oil production in the Bakken is no longer profitable.
Which shows what a fine fiscal pinnacle the state’s finances are balanced on. A pinnacle we wouldn’t be teetering on if the state’s leaders had been, in recent years, less focused on exploding the state budget and more focused on tax relief which would have driven investment and economic development outside of the oil industry.
Right now all our eggs are in one basket.
Update: Several readers have emailed me rig count projection from Raymond James which is embedded below.
Page 2 talks about a declining number of rigs in the United States. “Oil Activity Starts To Slow Now, Tumbles Later” reads one heading. Also, “Where are the rigs going to drop? On absolutenumbers, the largest number of rigs will likely come out of the “Big 3” plays (Eagle Ford, Permian, Bakken).”
