So far Governor Jack Dalrymple has been putting a brave face on for the sake of his aggressive 2015-2017 spending budget which assumes oil prices over $70 per barrel. But the oil price rout continues, and now the biggest player in oil development in North Dakota just announced a significant rig reduction and cut in capital expenditures for 2015.
This is Continental Resources. This is Harold Hamm. This is not a good sign, at the very least for the short term.
“The Company plans to decrease its current average operated rig count from approximately 50 to approximately 34 by the end of first quarter 2015 and average approximately 31 operated rigs for full-year 2015,” reads a press release.
Everyone keeps talking about the oil tax trigger. If WTI crude prices fall below a roughly $52 per-barrel price for five months the state’s effective rate on oil activity gets cut in half, which will cost billions in revenue.
But that’s just part of the picture. Consider the recent taxable sales and purchases report from Tax Commissioner Ryan Rauschenberger’s office. The number one county in the state for taxable sales and purchases was Williams County at over $1.2 billion.
Second was Cass County (Fargo) at over $888 million.
Cass County has one hell of a lot more citizens than Williams County. What’s casing the disproportionate amount of sales and purchases in Williams County is oil activity (Stark County, Ward County, McKenzie County and Burleigh County, among others, also have inflated numbers thanks to oil activity).
If oil companies keep stacking rigs (there have been others making announcements similar to Continental), that’s going to mean less economic activity. Which means fewer sales tax collections. They’ll also lay off workers, which means less income tax.
The pain from losing oil production revenue would be bad, but even if oil prices never hit the trigger, the impact from slowed economic activity would be nearly as bad.
Some political observers in the state have reacted to this news with a shrug. “So what?” they ask, pointing out that lower oil prices are good for the overall economy. They also point out that lower revenues could starve a spendthrift state government.
These are fine points, as far as they go, but I don’t think anyone should be rooting for a budget crisis. Like it or not, the state has grown its on-going spending commitments significantly over the last several bienniums not the least of which is increased obligation to local spending on schools which the state has implemented as supposed property tax relief.
About the only people in North Dakota who should be happy about plunging oil prices should be Democrats who have been rooting for this for some time.
A downturn in the state’s fortunes is probably their only path out of the political wilderness.