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.
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.