The North Dakota Oil Boom

"The collection of any taxes which are not absolutely required, which do not beyond reasonable doubt contribute to the public welfare, is only a species of legalized larceny. The wise and correct course to follow in taxation is not to destroy those who have already secured success, but to create conditions under which everyone will have a better chance to be successful." — Calvin Coolidge inaugural address, March 4, 1925.

Recently Barack Obama mocked his critics on the issue of gas prices. In his speech last week responding to high gas prices, President Barack Obama insisted that "we can't just drill our way out of" our energy woes. Actually, we can—and if the president wants proof, he should travel to boomtown USA: Williston, North Dakota.

He stated there was no silver bullet and that we were producing more oil than we have in recent years. What Obama did not say was that we were producing this oil on private and state-owned lands where the federal government had no authority to prevent the drilling and fracking operations. This has led to a boom in North Dakota, a state with a population 672,000 (2010 Census).

North Dakota was explored in 1738–1740 by French Canadians led by Sieur de la Verendrye. In 1803, the U.S. acquired most of North Dakota from France in the Louisiana Purchase. Lewis and Clark explored the region in 1804–1806, and the first settlements were made at Pembina in 1812 by Scottish and Irish families while this area was still in dispute between the U.S. and Great Britain. In 1818, the U.S. obtained the northeast part of North Dakota by treaty with Great Britain and took possession of Pembina in 1823. However, the region remained largely unsettled until the construction of the railroad in the 1870s and 1880s.

North Dakota is the most rural of all the states, with farms covering more than 90% of the land. North Dakota ranks first in the nation's production of spring and durum wheat; other agricultural products include barley, rye, sunflowers, dry edible beans, honey, oats, flaxseed, sugar beets, hay, beef cattle, sheep, and hogs.

For more than a decade, the state has had a strong economy, with unemployment lower than the national average, job and population growth, and low housing vacancies. Much of the growth has been based on development of the Bakken oil shale fields in the western part of the state, but it has also had growth in the technology and service sectors.

According to CNN Money “Thanks to hydraulic fracturing or "fracking" and high oil prices, oil production in the Bakken has exploded.”

“Nationwide there are a handful of shale oil fields that could contain as much as 17 billion barrels of oil, according to a recent study from IHS CERA. That's more than the country's largest oil field, Alaska's Prudhoe Bay.

"It's going to have a major impact on the United States reducing imports," Scott Sheffield, head of Pioneer Natural Resources Company, said Tuesday during a packed roundtable discussion on shale oil at CERA's annual energy conference in Houston.

Sheffield estimates that with the new technology, the country could produce an extra 2 million barrels a day from both the Bakken and from shale oil trapped in existing traditional oil fields.

"If we get 2 million barrels a day, that could have a major impact on world oil prices," said Guy Caruso, the former head of the EIA and now an advisor at the Center for Strategic and International Studies.

The quarter-million barrels a day currently being produced from the Bakken is already partly responsible for the glut of oil seen in Cushing, Okla., one of the United States' main oil storage and distribution hubs. The glut has helped distort U.S. oil prices in relation to the worldwide market.”

The average prices of a gallon of gas and a barrel of oil are near 150-year highs. Most pundits expect them to go higher. Are you ready for $5-per-gallon gasoline?

In a recent speech, President Barack Obama said: “We’re not going to be able to just drill our way out of the problem of high gas prices.” Actually, to a large extent, we can. For proof, let’s compare what’s been happening in California to the extraordinary accomplishments in North Dakota.

According to the Fraser Institute’s 2011 Global Petroleum Survey, California is the worst State in the Nation for its hostility to drilling. In fact, measured against the rest of the world, California ranks 91st.

Thanks to years of placating environmental extremists, California’s anti-drilling regulations make it almost impossible to drill for new oil anywhere in the State, onshore or off. As a result, its production of oil has fallen by nearly one-third in the past 20 years. As oil production has declined, so has tax revenue. Even with several gigantic tax increases during that period, oil revenues in the State are down.

That’s too bad, because California needs every penny of income it can get. It has one of the highest State sales taxes and personal income taxes in the country. Still, it’s not enough. The budget deficit for the coming fiscal year will top $9 billion — the fifth year in a row of billion-dollar deficits. Governor Jerry Brown’s proposed solution? Raise taxes even higher.

So you won’t be surprised to learn that wealthy Californians are fleeing the State as fast as they can. According to census data, almost one-third of its wealthiest residents — those earning $500,000 a year or more — fled the State between 2007 and 2009. On our Left Coast, they won’t drill for oil. And pretty soon, they won’t be able to drill many millionaires, either.

Let’s contrast the near-bankruptcy of the People’s Republic of California with what’s been happening in one of the most independent and entrepreneurial States in the union: North Dakota.

In 1995, the U.S. Geological Survey estimated that there were 150 million “technically recoverable barrels of oil” in an area of North Dakota known as the Bakken Shale. In 2008, the number had climbed to 4 billion barrels. Two years later, it had doubled to 8 billion barrels.

Today, thanks to vast improvements in recovery technology as well as the discovery of vast new oceans of underground oil, estimates of “recoverable” oil in the Bakken Shale have tripled to 24 billion barrels. That is more oil than is being produced anywhere else in the United States, including Alaska’s famed Prudhoe Bay. But it’s a small fraction of what is possible.

Experts say that current technology can extract only about 6 percent of the oil they know is underground in North Dakota. Total estimated oil reserves are thus around 500 billion barrels. And new discoveries are happening all of the time.

Let me include an interesting footnote on the subject of “reserves.” In 1980, the oil reserves in the United States were estimated at 30 billion barrels. Yet in the intervening 32 years, this country actually produced 77 billion barrels of oil. In other words, we produced more than 2.5 times more oil than the leading experts said there was 32 years earlier.

Today, the numbers are even more staggering. The amount of “technically recoverable” oil in the United States is estimated at 1.4 trillion barrels. (Please note that is “trillion,” with a “T.”) Unfortunately for us, most of that oil is located in areas Obama says we can’t search for it: in portions of Alaska and in waters off our shores.

Combined with known resources in Canada and Mexico, total recoverable oil in North America exceeds 1.7 trillion barrels. How much is that? Let me put it in perspective: It is more than all the oil the world has used since the first oil well was drilled in Titusville, Penn., 150 years ago.

So far, all I’ve discussed is oil. When natural gas and coal are added to the total, the numbers are clear: We have enough energy reserves in the United States to fuel all of our needs for 100 years, even if we never made another discovery.

Back to North Dakota for a moment. The effect of the bonanza there has been extraordinary. Stephen Moore, writes in the Wall Street Journal that what is happening in Williston, N.D., “is what the Gold Rush might have looked like had it happened in the time of McDonald’s, Wal-Mart and Home Depot.” Moore states in his report:

“When I ask how many people live in Williston, which had a population of 12,000 in 2005, longtime residents shrug and offer different answers: 20,000? 25,000? 30,000? Every night, hundreds of workers sleep in the hulls of their trucks or in temporary housing encampments like soldiers in a war zone. New homes are popping up at breakneck speed. McDonald's is offering workers $18 an hour plus a "signing bonus." In Williston, certainly, America remains the land of opportunity.

All this is thanks to the technological leap forward represented by hydraulic fracking, a process that allows drillers to blast through underground shale rock and pump out oil and natural gas. Projections of how much oil is here seem to grow every year.

In 1995, the U.S. Geological Survey estimated 150 million "technically recoverable barrels of oil" from the Bakken Shale. In April 2008 that number was up to about four billion barrels, and in 2010 geologists at Continental Resources (the major drilling operation in North Dakota) put it at eight billion. This week, given the discovery of a lower shelf of oil, they announced 24 billion barrels. Current technology allows for the extraction of only about 6% of the oil trapped one to two miles beneath the earth's surface, so as the technology advances recoverable oil could eventually exceed 500 billion barrels.”

The State has the lowest unemployment rate in the Nation, at just 3.3 percent. California’s, by contrast, is 11.1 percent. That doesn’t even count the unemployed people who have simply stopped looking for work. The true unemployment number is probably closer to 20 percent.

According to the Census Bureau, North Dakota led the Nation in job and income growth in 2011. While California is losing millionaires every day, North Dakota is creating them faster than anyplace else in the country. But even entry-level positions are benefiting. For example, a job flipping burgers at McDonald’s pays $18 an hour plus a “signing bonus” for new employees.

And while the State of California can’t begin to pay all of its bills — it even issued IOUs last year in place of tax refunds — the biggest argument in North Dakota’s State Capitol is how to spend all of the money that’s pouring in. Legislators in Bismarck have approved hundreds of “shovel ready” infrastructure projects, including roads, bridges, railroads and pipelines. But even while spending more on worthwhile projects, legislators also agreed to cut the State income tax.

What’s happening in North Dakota is a classic example of the one thing that would solve our energy problems everywhere — and most other problems in the economy, too. Unfortunately, it’s the one thing Obama and his team won’t even consider.

The solution is simple: Let the market work.

In his State of the Union address in January, Obama declared that “This country needs an all-out, all-of-the-above strategy that develops every available source of American energy.”

Like so much that comes out of our President’s mouth, the sentence was as misleading as his skilled staff of speechwriters could make it. What he meant was that his Administration would continue pouring billions of dollars into every wasteful alternative energy pipe dream they could think up, while continuing to slap higher taxes and more regulatory handcuffs on the businesses that can actually solve our energy needs and make money (and pay taxes) doing it.

Rather than foster energy independence, Obama wants to make us all dependent. Dependent on government, that is.

Want to reduce unemployment? Increase tax revenues? Get the economy humming again? Truly foster energy independence?

The answer to all of them is the same: Get government off our backs. Let the market work. The results will be amazing. Maybe next year God will grant us a government that’s willing to give it a try.

Let’s All Go to North Dakota

“Reason obeys itself; and ignorance submits to whatever is dictated to it." — Thomas Paine

It is an interesting fact that if you rent a 26 foot U-Haul moving truck in Los Angeles and drive it to Dallas, Texas it will cost you $2,180. If you rent the same truck in Dallas and drive it to Los Angeles it will cost $895.00.

Why, you might ask is this disparity in rental cost to dramatic? You see many more people are leaving Los Angeles for other, more friendly locations than are migrating to L.A. So when a person relocating from Los Angeles to Texas rents a truck the U-Haul company has to pay someone to drive it back and that cost is factored into the rental cost.

On January 12, 2009 the Associated Press reported: “The number of people leaving California for another state outstripped the number moving in from another state during the year ending on July 1, 2008. California lost a net total of 144,000 people during that period — more than any other state, according to census estimates. That is about equal to the population of Syracuse, N.Y.”

“California's loss is extremely small in a state of 38 million. And, in fact, the state's population continues to increase overall because of births and immigration, legal and illegal. But it is the fourth consecutive year that more residents decamped from California for other states than arrived here from within the U.S.”

In the two years since AP reported on this issue unemployment in the state has risen to 12.4% and the latest estimates for outward migration is now ay around 190,000. As the article points out the overall population is not decreasing, but the offset to the migrations is mainly from high birth rates among the poor and illegal immigration. You can read my last post on the conditions in California by clicking here.

Forbes Magazine has published an interactive map where you can chose a city to see the migration patterns in or out of that city. The red lines represent outward patterns and the black people who are moving in. Try a few cities and see what is happening across the nation when it comes to fleeing some of our largest cities.

Joel Kotkin writes in the Wall Street Journal: “Living on the harsh, wind-swept northern Great Plains, North Dakotans lean towards the practical in economic development. Finding themselves sitting on prodigious pools of oil—estimated by the state's Department of Mineral Resources at least 4.3 billion barrels—they are out drilling like mad. And the state is booming.”

“Unemployment is 3.8%, and according to a Gallup survey last month, North Dakota has the best job market in the country. Its economy "sticks out like a diamond in a bowl of cherry pits," says Ron Wirtz, editor of the Minneapolis Fed's newspaper, fedgazette. The state's population, slightly more than 672,000, is up nearly 5% since 2000.”

“The biggest impetus for the good times lies with energy development. Around 650 wells were drilled last year in North Dakota, and the state Department of Mineral Resources envisions another 5,500 new wells over the next two decades. Between 2005 and 2009, oil industry revenues have tripled to $12.7 billion from $4.2 billion, creating more than 13,000 jobs.”

“Already fourth in oil production behind Texas, Alaska and California, the state is positioned to advance on its competitors. Drilling in both Alaska and the Gulf, for example, is currently being restrained by Washington-imposed regulations. And progressives in California—which sits on its own prodigious oil supplies—abhor drilling, promising green jobs while suffering double-digit unemployment, higher utility rates and the prospect of mind-numbing new regulations that are designed to combat global warming and are all but certain to depress future growth. In North Dakota, by contrast, even the state's Democrats—such as Sen. Kent Conrad and former Sen. Byron Dorgan—tend to be pro-oil. The industry services the old-fashioned liberal goal of making middle-class constituents wealthier.”

“Oil also is the principal reason North Dakota enjoys arguably the best fiscal situation in all the states. With a severance tax on locally produced oil, there's a growing state surplus. Recent estimates put an extra $1 billion in the state's coffers this year, and that's based on a now-low price of $70 a barrel.”

Kotkin continues: “North Dakota, however, is no one-note Prairie sheikdom. The state enjoys prodigious coal supplies and has—yes—even moved heavily into wind-generated electricity, now ranking ninth in the country. Thanks to global demand, North Dakota's crop sales are strong, but they are no longer the dominant economic driver—agriculture employs only 7.2% of the state's work force.”

“Perhaps more surprising, North Dakota is also attracting high-tech. For years many of the state's talented graduates left home, but that brain drain is beginning to reverse. This has been critical to the success of many companies, such as Great Plains Software, which was founded in the 1980s and sold to Microsoft in 2001 for $1.1 billion. The firm has well over 1,000 employees.”

“The corridor between Grand Forks and Fargo along the Red River (the border between North Dakota and Minnesota) has grown rapidly in the past decade. It now boasts the headquarters of Microsoft Business Systems and firms such as PacketDigital, which makes microelectronics for portable electronic devices and systems. There are also biotech firms such as Aldevron, which manufactures proteins for biomedical research. Between 2002 and 2009, state employment in science, technology, engineering and math-related professions grew over 30%, according to EMSI, an economic modeling firm. This is five times the national average.”

“While the overall numbers are still small compared to those of bigger states, North Dakota now outperforms the nation in everything from the percentage of college graduates under the age of 45 to per-capita numbers of engineering and science graduates. Median household income in 2009 was $49,450, up from $42,235 in 2000. That 17% increase over the last decade was three times the rate of Massachusetts and more than 10 times that of California.”

“Some cities, notably Fargo (population 95,000), have emerged as magnets. "Our parking lot has 20 license plates in it," notes Niles Hushka, co-founder of Kadrmas, Lee and Jackson, an engineering firm active in Great Plains energy development. Broadway Drive in Fargo's downtown boasts art galleries, good restaurants and young urban professionals hanging out in an array of bars. This urban revival is a source of great pride in Fargo.”

“What accounts for the state's success? Dakotans didn't bet the farm, so to speak, on solar cells, high-density housing or high-speed rail. Taxes are moderate—the state ranks near the middle in terms of tax per capita, according to the Tax Foundation—and North Dakota is a right-to-work state, which makes it attractive to new employers, especially in manufacturing. But the state's real key to success is doing the first things first—such as producing energy, food and specialized manufactured goods for which there is a growing, world-wide market. This is what creates the employment and wealth that can support environmental protection and higher education.”

It boils down to having fewer and less onerous regulations, less bureaucracy, lower taxes and a climate attractive to business and investment. California was once like this, but the state drifted too far to the right with its many initiative’s, environmental regulations, high taxes and enormous public service sector pensions. The state has been run by left wing Democratic controlled state legislatures and large cities. More and more states once thought of as being backward farming states are attracting business and investment, especially in technology, pharmaceuticals, banking and energy. I am certain that the folks in North Dakota’s eastern neighbor, Minnesota, are taking notice — you betcha.

Thankfully, this kind of sensible thinking is making a comeback in some other states, such as Ohio and Pennsylvania. This is what Governor Scott Walker is attempting to do in Wisconsin.