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Three years after a sharp drop in the price of oil triggered an economic slowdown in western North Dakota, a gradual recovery is under way in the region. Higher and fairly stable oil prices since 2016 have increased oil drilling and production, energy companies and other employers are hiring again, and spending is up at local businesses.
A key driver of fresh economic growth is more efficient shale-oil drilling and extraction techniques that allow oil producers to turn a profit at lower oil prices than were possible just a few years ago.
However, productivity gains have reduced the labor and capital spending necessary to extract a given amount of oil and natural gas. As a result, any further increases in employment, spending and housing construction may not approach the torrid economic growth that occurred in the Bakken region during the oil boom that began a decade ago.
The oil and gas industry is the engine of the Bakken economy, and the price of oil determines whether it sputters or hums along.
The price of West Texas Intermediate, a grade of crude that serves as a benchmark in the U.S. oil market, went into free fall in 2014 (Chart 1). This led to cutbacks in the number of drilling rigs working the Bakken shale-oil formation, which extends into eastern Montana. Oil production subsequently fell as fewer new wells came online. But since the fall of 2016, the WTI price has consistently topped $45 per barrel and, as of mid-January, it stood at $64. Because of the cost of transporting crude oil produced in the Bakken to coastal refineries, it typically trades about $10 per barrel below the WTI price.
Oil producers have responded to higher crude prices by stepping up drilling. Over the past 18 months, the number of rigs operating in the Bakken has risen to about 50, although drilling activity is nowhere near the levels of three years ago. Oil production has also increased, according to state figures; after sinking to a low point last February, monthly output had risen 21 percent to about 37 million barrels by November 2017.
North Dakota accounts for all of the increase in rigs and extracted oil. Oil production in three eastern Montana counties on the edge of the Bakken shale play amounts to just a sliver of oil output and has been in decline since the mid-2000s.
The break-even point for drilling new oil wells in North Dakota is about $50 per barrel, based on estimates by the North Dakota Department of Mineral Resources. If the WTI price rises above $55 for more than three months, the Bakken rig count is likely to rise. If the price drops below $45 per barrel for more than a month, oil companies are likely to slow the pace of drilling by withdrawing rigs from less productive areas.
A decade ago, this drill or no-drill price threshold was markedly higher. In the interim, improved drilling techniques and the realization of economies of scale have slashed the cost of extracting a barrel of crude from the ground. For example, faster well drilling saves labor; a Bakken well can be completed in 13 to 18 days, less than half the time it took 10 years ago. And operating more wells per “pad” or wellsite (six per well is typical today) means that less oilfield infrastructure, such as roads and water and gas lines, is needed to serve wells.
Lower oil prices in recent years also led oil companies to target for drilling the most productive Bakken acreage that would yield the highest rate of return.
Technological advances combined with a focus on the Bakken’s sweet spots have resulted in a tripling of drilling productivity in the Bakken since 2014, even as the number of rigs has fallen (Chart 2). Efficiency gains are likely to support further increases in drilling and oil production this year, even if forecasts of higher oil prices don’t pan out and prices hold steady.
New jobs—and more to fill
Resurgent oil and gas production has lifted employment, tax revenues and other economic indicators in the Bakken region.
Unemployment in Bakken counties rose sharply after oil prices slumped, but over the past year it has fallen significantly (Chart 3). Although as of last November, the average jobless rate in Bakken counties had yet to fall as low as the rate in North Dakota as a whole.
Drilling firms and oilfield service companies have ramped up their hiring. In November, there were 19,600 workers in the North Dakota job sector that comprises mostly oil and gas workers in the Bakken, according to the Bureau of Labor Statistics—well below the employment peak three years earlier, but 26 percent higher than the same month in 2016.
And many available jobs remain unfilled at energy companies and in other sectors of the economy, such as health care and hospitality. In December, employers in Bakken counties posted 3,086 online job openings, a 3 percent year-over-year increase, according to Job Service North Dakota.
Increased oil and gas activity in the Bakken is likely responsible for a rebound in sales tax revenue collected by local governments. Sales taxes paid to cities, counties and school districts across the Bakken fell in 2015, but during the recent holiday season, tax collections were up in Williston and Dickinson, N.D., two important trading centers in the region (Chart 4).
State taxes on oil production are another key source of revenue for local governments in the Bakken; in North Dakota, 20 percent of state collections go to oil-producing jurisdictions, based on their population.
North Dakota oil tax revenues haven’t recovered fully from the oil industry downturn, but as oil production has increased, so have receipts, supporting renewed spending in public services such as schools, roads and water treatment. Oil extraction and gross production tax revenues plummeted 42 percent in 2016, but the state tax commissioner was forecasting only a 2 percent annual decline for last year.
Homebuilding slow for now
For all these signs of revival in the Bakken, one part of the regional economy has been slow to respond to higher oil prices and increased oil-related activity.
Housing construction surged during the oil boom to accommodate thousands of newcomers who came to the Bakken to take jobs in the oilfields and in other industries. At the peak of the building boom in 2014, close to 400 homes and apartment buildings worth a combined $232 million went up in Williston, the largest city in the region.
When workers in oil firms or supporting businesses lost their jobs, many left the region to seek opportunity elsewhere, taking their families with them and reducing demand for housing. As of November, the city had permitted only 24 new single-family homes in 2017—a slight increase from 2016. No new apartment buildings have gone up in the city over the past two years.
A source in the Williston homebuilding industry said that building activity had picked up in the second half of 2017, and she expected more single-family home construction and renewed apartment development this year as long as oil prices remain stable, supporting hiring and housing demand.
But housing starts—and other measures of economic growth such as employment and firm sales—may not return to levels seen during the oil boom because of the same advances in oilfield technology that enabled the Bakken’s modest resurgence.
At a given oil price that supports drilling, fewer oil workers and less capital spending per barrel of oil reduce potential hiring and spending in the regional economy. Thus, productivity gains may limit economic growth in the Bakken even as oil drilling and production increase in response to higher oil prices.
How thick and tall the green shoots in the Bakken ultimately grow depends upon the price of oil and how households and businesses in the region—including oil firms striving to increase productivity—respond to that strong market signal.
