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Time to help America’s oil industry compete with OPEC

Over the Thanksgiving holiday some news broke that no doubt has many North Dakotans – private citizens and policymakers alike – feeling a bit nervous. OPEC, the international oil cartel, has announced that they won’t be cutting oil production in the face of dropping prices. That means oil prices are going to remain low for the foreseeable future, and places like North Dakota, which are high-cost oil plays due to factors like weather and the quality of oil produced are going to be hard hit.

That’s a scary thing for this state. To illustrate how scary, consider that the state increased general fund spending by 62 percent this biennium and per-capita spending has increased 171 percent since 2003.

Those increases were built primarily on oil tax revenues. In calendar year 2013 more than half of North Dakota’s tax revenues were directly from oil and gas production. Far more than half is attributable to the oil boom when you consider indirect impacts on revenue streams like sales and income taxes.

To be fair, a lot of that spending isn’t necessarily an increase in on-going spending (which is to say that a lot of it was the expense of building or upgrading things like roads), but even so. The drop in oil prices is scary. “Every dollar [in lower oil prices] is about $100 million of just oil taxes off the table based on production, holding that constant,” Tax Commissioner Ryan Rauschenberger told me earlier this month. “So if you take $10 off the price of oil that’s a billion dollars.”

So what can be done? Obviously, lawmakers need to watch spending growth, but there are other policy changes which can and should be changed as well to protect North Dakota’s oil boom. But not protectionism through government interference, but protectionism through free-market policies that lower the burdens on the industry.

In related news, Oil steadies near four-year low as glut looms after OPEC.

Lower oil taxes

North Dakota Democrats have been trying to turn any attempt to address North Dakota’s high and needlessly complicated oil tax into a sort of political third rail. That’s extremely short sighted.

Currently North Dakota’s oil and gas taxes are at an effective rate of about 11 percent, which is one of the highest in the nation. But that rate is not only high, it changes based on oil prices.

If they drop down under $52/barrel for at least five months the effective oil tax rate would be cut roughly in half. Meaning the state would get a double whammy on revenues. Not only would they be hit by lower revenues from production halted by low prices, but the state would be collecting about half as much in taxes from what production remained.

Lowering the tax rate, and turning it into a consistent rate unpinned from oil prices, would be good not only for the oil industry but for the state. The oil industry would get a lower tax that’s more predictable to help them weather this price war with OPEC, and the state could be more confident in future oil tax revenues.

Build the damn pipelines

One major problem with the Bakken oil fields is getting the oil to market. Right now most of the oil leaves the state on trains, but that’s problematic. Trains are expensive. Some high-profile and explosive derailments have, understandably, ignited public concerns over safety. And, oh yeah, we’re pretty much out of rail capacity. Oil shipments have crowded out agriculture shipments creating pain for North Dakota’s other most important industry.

Meanwhile, the Democrats’ high-profile blockade of the Keystone pipeline has not only blocked a project that would represent about 100,000 barrels per day of capacity for Bakken oil but has also inspired protests against other much-needed pipelines like the Sandpiper line which would run from Tioga, ND through Minnesota to Wisconsin and would take as much as 250,000 barrels per day.

Access to that sort of infrastructure would lower cost of producing oil in the Bakken region, again making the oil play here more resilient in the face of OPEC’s market manipulations.

Allow the export of unrefined oil and gas

One problem with America’s domestic oil and gas markets is that the refiners basically have a captive audience. With few exceptions, American oil and gas producers cannot ship their unrefined product abroad for sale. It must be sold to refiners here in the U.S. before export. That’s a tremendous boon for the refineries, but it severely restricts that market American oil and gas producers can access.

So open it up. Allow the export of unrefined oil and gas to meet international demand. An expanded market would, again, help put American oil and gas producers on an even footing with OPEC.

 

81 comments

    • I’m against all of the above. I think the spread on oil between WTI & Brent works to the USA’s benefit. We have a competitive advantage for our manufacturers.

      Want to fight fire with fire? Import tariff on foreign oil imports tagged to $70/barrel. That supports domestic production while improving the guvmint’s sorry balance sheet. You have a better chance of passing a tariff than you do any of those other suggestions.

      BTW, we shouldn’t be exporting our natural gas either.

  1. Oil by rail isn’t going away. There are many reasons why. Maybe an economic illiterate can explain it to Port.

  2. Currently; Bakken producers can leave butane, propane, ethane….in the crude for rail shipment, and get the crude price for them all. That doesn’t work for pipelines.

  3. Yes; build more pipelines. The “Bakken Crude Express” pipeline and the “Dakota Express” pipeline proposals died on the vine due to oil industry indifference. They would have actually carried a significant amount of Bakken crude, but that was the free market at work, and we’re not allowed to criticize the decisions of oil companies.

  4. The Keystone has nothing to do with the Sandpiper.

  5. All the people that have been condemning the oil boom and being self righteous about protecting the state are about to get a huge reality check. Watch what happens if North Dakota loses its highest sources of income.

  6. Cartel or not. It puts a lot of ease on a vast majority of infrastructure pertaining to crude especially just getting to work. When you witness gas stations build and build for 3 straight years and , not just remodel . It’s leveled and a complete new building go up, now that’s a lot of candy and pop.

  7. The only question that remains is can we frack competitive for $20.00 per berral. Its a matter of national securate.y

  8. Now with these prices, we should stop buying any Non-U.S., Load our Petroleum Reserves, bring on more domestic offshore exploration, Alaska, Lower 48 Oil and Gas, Keystone Pipeline, help Canada and Mexico get output up, and leave OPEC in the past. Pull back our military dollars from protecting Middle Eastern Oil and Gas Reserves. Open US exports for Oil and Natural Gas now.

  9. People, if you have been in the industry for awhile you would understand that this is part of the cycle. We are about to go back to drilling for Natural Gas. Screw North Dakota, I hope I never have to go back there again!

  10. Stop protecting Saudi Arabia and let Russia go in there and kick there ass!!!

  11. Ron, are you familiar with the industry? You don’t simply take raw production fluids and magically turn them into fractionated chemicals ready for market.

  12. I’m a engineer some of ur ideas

  13. Good oil should be $50 a barrel and$1.75 a gallon gas. We have all been raped by big oil long enough. I’m tired of production cuts so big oil can stick it to us

    • $50 oil is simply not profitable in most US oil producing regions , to support your position would be totally destroy The American Energy sector , in turn putting the Saudis , Venezuela and the rest of the Middle East in total control of the energy America needs ! Still think $1.75 gas is that great ?

    • And your market analysis expertise comes from where? Or just your wishful, yet spiteful, thinking of the “conspiracy of big oil?”

      $50 a barrel? Watch as we go through another recession.

    • Lol a recession because gas is affordable. You must be a politician.

    • And we want to purchase as much oil cheap as possible from the Middle East and keep our own. At some point we will have all the oil and the food. Guess that puts the USA in a pretty good position right

    • Sounds good but you actually don’t know what you are talking about Hart.

    • Right. Let’s keep raping the American consumer with high priced energy while the fat cat CEOs of the energy sector sit on their big yachts and live it up. … And we can just keep on handing the subsidy money as well while the profits rack up into the billions over and over year after year…Let’s run propane prices through the roof on a “shortage” while people freeze to death. I do know what I’m talking about. I have see it all first hand .. I have seen people I know loose houses and sell of personal items to pay for gas to get to work… And propane to heat their homes…Fat cat oil can kiss our behinds … I for one am sick to death of being held hostage at the pump!

    • I am not offended by this comment since I work for small oil.

    • What about all the jobs it has created and keeps creating. The oil boom hit at the right time and helped pull us from the recession.

    • It has created jobs and that’s great! But if OPEC and all of its members want to do a fire sale on oil I’m all for it. It won’t be long term… Most if not all the members of OPEC hate the USA. A price drop will help fuel the economy not recess it. People will have more to spend on other things. We all know its short term so enjoy the lower pump prices for a while. :-). Bakken oil and oil exploration isn’t going anywhere anytime soon.

    • It goes under at $50/barrel. That’s the break even number for the Bakken. Below that number it costs the producer money and isn’t worth it. That’s their total investment cost paid off in a reasonable amount of time. To frack a North Dakota well may cost up to $3 to $5 million for each well. The average oil company produces a profit of 5 to 6%, the only reason they have large profit dollars is that they sell a large volume. The average restaurant has higher margins than any of the big oil companies. You lack of understanding of how business is conducted is evident. Big oil is big because it sells a lot.

      CEOs making millions is worth it because of their level of responsibility. You wouldn’t expect a person paid to sweep floors to make the same as a heavy equipment operator. A CEO is responsible for the entire company and their compensation traditionally hinges on bonuses paid for performance by the company as a whole. Who has more responsibility, the guy operating the rig or the guy in charge of hundreds of rigs? Then who should get paid more?

    • I pumped gas at $39.9 a gallon when I was 16. At 25 I made $12 hr. working at Harley York plant. A month ago I was paying $3.89 a gallon and you can’t find a job paying more than $8 hr. Big oil sucks as do the corporations not paying enough to there employees.

    • Hart Nordbye the ceo’s sit on nice stuff because they work led hard to get where they are If you had any common sense you would think the same and want oil at 100 bucks a barrel

    • So Big Oil is raping us at the pump? Lol….Big Oil provides jobs for thousands of people who have lost their jobs because of a poor economy caused by a high taxing Federal Government. The Federal Government isthe one that is raping the American Worker and the Company he works for so they can spend all the theTax money on dumbass programs and making more and more people dependent on on them. Case after case it is proven when you cut taxes for everyone across the board you increase jobs and revenue. And everyone wins. It doesnt matter if my gas is $3.50 when you can double or triple your income with a better job becasue of Big Oil.

  14. Hey Hart, what about your job or any other ripple effect of unemployment whether in the Bakken or any place else in the USA. Its not just one thing that can be changed without effecting everything else that has to do with the economy. Since you don’t like what the oil has done for North Dakota, why don’t you have the gov. Give all the revenue back so your taxes can be higher. Oh and don’t tryntalking about the trashy people the oilfield has brought in, there was trashy people before and will be trashy true North Dakotans after its all said and done…. now go cry in the corner like a good little brat!!!

  15. If this field bust, North Dakota will learn a lesson that many of us have learned already. Don’t become too dependant on that oilfield money… Let’s not forget about the DJ Basin. It won’t be far behind.

  16. Tighten your belts cause here we go again. Let these rag heads rule the dollar.

  17. Might have to take from Louisiana for once, cut spending in North Dakota. We Did and are !

  18. Maybe we should stop import of oil base products .

  19. We are at war with these guys. It is their attempt to shut us down. We are getting to them. Now more than ever we need to ramp up, screw them, and use our on fuel.

  20. Don’t let the Canadian owned pipeline go through it means jobs for us now but they will screw us

  21. Everyone seems to forget about the trump card OPEC holds, oil is traded in the US dollar and if that was to change we would become a third world country over night.

  22. Yes go drill on the Whitmer land in Eastern Mt

  23. Oil back up to $65 a barrel according to Forbes today!

  24. Hope it doesn’t effect my job here

  25. OPEC trying to undercut other producers. It worked in the 70’s

  26. Keep our production up enough to get their oil cheap. Win win for us.

  27. If it wasn’t obvious before it is now, it’s the US against OPEC. They really shouldn’t poke the tiger with a stick.

  28. Hey Tom grow up. I never said one word about people being trashy… Or bashing anyone that works in North Dakota or is from North Dakota…..I’m just not going to cry for big oil sorry. As far as me crying in a corner lol. That has never and would never happen.

  29. Keep “Rock’n the Baaken”
    And hello to all the SM Energy people freezing in Divide County ND.

  30. Hard to paint an organization as “evil” when, because of their actions, I’m saving $2.00 a gallon on gas…

  31. Quit dealing with OPEC. By the time we run out of oil there will be new technology that will make oil obsolete. Remember, you heard it here first.

  32. Sweet. Maybe now Williston can return to a semi normal city.

  33. Many of us have been thru this in the early 80’s and we sat back and watched so many make the same mistakes we did, live like rock stars thinking the money will never end. Well it did end and it will again, maybe not this time but it will. Spend wisely and don’t buy anything you can’t pay for because believe
    me the big wages go away a lot faster than the big payments.

  34. Yea and you don’t know how bad it can be I lived through the oil embargo in 1982 till about 1990 and you could not buy a job sweeping the floors or to drive a trash truck here in Louisiana so go ahead and think it’s a good thing that the price is coming down on oil to make it cheaper at the pump. That 8.00 an hour job you can get now will not even be available so you will not even be able to buy that low priced gas cause you have no job at all.

  35. The breakeven price depends on the county. McKenzie and Williams and a few others are round 34$ bbl

  36. Sounds nice. I dont think its cold enough to keep democrats hands in their own pockets yet. Too bad; we have the potential to fix our middle east problems finacially if we would.

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