Despite the precipitous drop in oil prices, North Dakota has increased savings by $3 billion over the past 12 months.
Bakken.com recently conducted an analysis of over 80 North Dakota funds and calculated the most recent balances to be in excess of $18.5 billion (see infographic). This represents a 22 percent increase from $15.5 billion in 2014 and a 125 percent increase from $8 billion in 2011.
Savings despite oil price plunge
So how has North Dakota continued to substantially increase savings when oil and gas prices have fallen so dramatically? With no meaningful public debt, North Dakota is one of only 15 states that hold the S&P AAA credit rating.
In 2014 the total amount of oil extraction and production taxes collected was in excess of $3.2 billion. In addition to receiving tax revenue from oil and gas, the state owns over one million acres of land that generates income from royalties and leasing activities. Even with lower oil prices, North Dakota has continued to produce over 1.2 million barrels of oil per day and still continues to collect a considerable amount of revenue from the petroleum industry.
There is no question the amount of oil and gas revenue collected by North Dakota is declining. However, each biennium North Dakota’s general operating budget only receives $300 million of oil and gas taxes (5.3 percent of the total budget). Oil production would need to decline by 85 percent to impact the current state budget. As North Dakota collects revenue in excess of the general budget allocation, the remaining funds are deposited into a variety of savings, trusts and budget stabilization funds.
In 2011 voters created the Legacy Fund in order to allocate a portion of oil and gas taxes to a public trust for future generations. This, along with other long standing funding requirements for constitutionally protected funds like the Common Schools Trust Fund, has created a massive savings mechanism for the state. The net result will be a continuation of funding of these saving accounts.
North Dakota has already deployed a significant amount of investment capital as a result of these formulas. Historically the state’s investment board has achieved an average annual rate of return of over 7 percent. Even if no additional capital was contributed to any of the savings accounts, which is highly unlikely, the existing portfolio will continue to grow from investment income.
Economic growth through a diversified strategy
In addition to a conservative savings strategy, North Dakota has been successful in diversifying its economic base. As a result, North Dakota benefits from the national economic recovery that may be buffering some of the potential damaging effects of lower commodity prices.
In 2015 the state allocated $3 billion to infrastructure projects. Despite the lowest oil prices in seven years, North Dakota continues to enjoy solid economic growth and some of the lowest unemployment rates in the country. As a result, the state has a current budget surplus of $324 million.
As North Dakota adapts to the reality of lower energy prices, it appears to be making a soft landing from what many feared would be a massive crash. The financial decisions made during the past decade appear to have put North Dakota on solid ground to weather whatever storm is on the horizon.