Over the past few years, the oil patch area of western North Dakota and eastern Montana has become a center of national attention. After many years of population declines, the cities and small towns of this largely rural region have seen a massive influx of people and dollars. The cause is a boom in oil drilling and extraction that has turned North Dakota into the nation’s second-largest oil-producing state, and the one with the lowest unemployment.
While this boom has been good for many, it has also raised a number of economic questions about the consequences of the boom and the oil drilling, and about the long-run health of the state’s economy. For this reason, the Federal Reserve Bank of Minneapolis has decided that its 25th annual essay contest will ask students: How should North Dakota handle its oil boom?
This primer is intended to get students thinking about the topic. It is far from the last word on the subject, but rather is a stepping-off point for students who want to write a good essay.
An embarrassment of riches
At first thought, this may seem a strange question. Encouraging growth is the goal of most economic policies, and the oil patch is experiencing rapid growth, so what’s the problem? Is it possible to have too much growth? For much of the nation—recovering slowly from a deep recession—this must seem like a good problem to have.
But exceptionally rapid growth brings its own set of challenges. So many workers have moved to the oil patch for jobs that housing for them is in short supply. This shortage has caused a big increase in the rents current residents pay and a lack of hotel space. While much housing has been built, stories about workers moving to the oil patch and living out of their cars remain common.
Meanwhile, even with this influx of people, employees can be hard to find. Many workers have left lower-paying jobs to work in oil-related positions, and this has led to a shortage of retail and service workers. Some fast food restaurants have been offering starting wages as high as $17 an hour! The big increase in demand from all the new customers (many of whom have higher incomes to spend) has made that situation all the more dramatic. Finally, thanks to the growth in population and economic activity, the demand for services like education and health care has also grown.
Students might choose to write an essay on what role, if any, the state could play in easing the impact of this growth: Are there policies that could attract more workers or get more housing built? Perhaps the government could apply the brakes through regulation or taxes, which could have other negative consequences. Or maybe the state is already preventing growing demand for workers and housing from being met through policies it can eliminate.
Essays could argue any of these positions or take a different angle, but arguments must be supported with evidence and good economic analysis.
Spillovers
The issues mentioned above—higher rents, a lack of available workers or services—ultimately represent changes in costs, but they are costs that are borne by individuals or firms. However, the boom might generate other costs that are borne by the broader community.
One example of such a cost is traffic congestion. The amount of truck traffic in the oil patch has skyrocketed, which has led to problems in areas where the roads weren’t built to handle such high volumes of traffic. This results in more time spent by residents on the road, which is less time they could be working or enjoying themselves.
Another cost is pollution—spills of oil or byproducts can be harmful to groundwater supplies or ecosystems. When an economic activity produces costs for others not involved, it is known as a negative externality. Economists have long understood that when markets produce negative externalities, there might be a role for government to reduce the social costs or to ensure that those responsible end up paying (through taxes or fine, for example).
Once again, government interventions can impose their own unintended consequences, so they must be considered carefully, weighing the costs and benefits. Perhaps an essay could examine one or more externalities created by the oil boom and argue for a policy intervention to address it.
In the long run...
Negative consequences aside, the oil in the ground is undoubtedly a blessing for North Dakota. However, it won’t be there forever, and what will happen when it is gone? The area is dotted with ghost towns that were once the site of mining booms, and oil patch residents surely don’t want to see their homes end up the same way.
This is the fundamental challenge of growth based on exhaustible resources. However, decline is not inevitable. The oil boom is generating a lot of revenue, and if it is invested well, it can lead to a prosperous future after the wells run dry. There are examples of nations and communities that have used their resource wealth to achieve sustainable growth. Essays might compare the oil patch boom to cases that did not end so well and thereby learn what kinds of policies North Dakota should follow.
The state has the power to direct wealth generated from the oil boom to long-run investments, but there is no guarantee they will succeed. Students, if you want to make this argument, you must explain why and how the state can make the “right” investments without squandering wealth. If you argue that the private sector will best handle the challenge of long-run growth, you must have an answer for why resource booms so often end in busts elsewhere.
These are just a few examples of many economic issues surrounding the oil boom that you might examine in your essay. A unique or creative angle will receive special consideration, so try to think outside the box. But whatever your viewpoint, to write a winning essay you must assemble good research and weave it with sound economic logic. Good luck!
If you have any questions, contact Joe Mahon at Joseph.Mahon@mpls.frb.org or call 612-204-5254.
Additional information about the Bakken Oil Boom is available in past online issues of The Region and fedgazette.