Jobs abound in North Dakota (Libby Nelson)

North Dakota’s quest not to blow its oil wealth

by Libby Nelson on December 11, 2014

WATFORD CITY, N.D. — Valerie Swensrud used to be a small-town North Dakota postmaster, the kind of job where you know everyone’s name. Now retired, she works as a volunteer at the Watford City business center, and every day is filled with strangers and newcomers.

Twelve thousand trucks drive past every day, causing half-mile backups at makeshift traffic lights put up where a stop sign once sufficed. Migrants from Florida, Arizona, and California, drawn by the promise of a boomtown, stop in to ask Swensrud where they can find housing and what it will cost.

She tells them that an apartment in Watford City costs as much as an apartment in Washington, DC. If you keep driving up Highway 85 to Williston, the epicenter of North Dakota’s oil boom about 30 miles north of Watford City, it costs even more.

Swensrud has seen an oil boom in North Dakota before. Her husband worked in the oil industry, and when oil prices soared in the 1980s, housing demand in western North Dakota was so high that she waited a year to buy a house. But that boom lasted only about six years, drying up when oil prices dropped to $9 per barrel.

The state legislature reconvenes for its first session in two years in January. It will face a tug of war.

Then, in the mid-2000s, hydraulic fracturing opened up the Bakken formation, layers of shale rock with oil locked deep within about two miles below North Dakota’s sandy soil. Since then, the biggest boom in North Dakota history — and one of the biggest ever in the United States — has exploded. Swensrud says it’s like nothing she’s ever seen: “We just woke up, and it was lots of drilling.”

The state is oozing not just oil, but also wealth: wages are up, and demand for nearly everything — housing, hospitals, schools — is high. But the boom and bust of the 1980s left a psychic mark. People know oil doesn’t last forever.

The question that North Dakota now confronts is what to do with its newfound wealth — a question that becomes even more urgent as oil prices tumble.

The state could easily fall victim to the “paradox of plenty”: relying too heavily on one industry — mineral extraction — to fill its state coffers, employ its residents, and support its economy. Economists have seen this happen to countries such as the Netherlands, and to individual states like Alaska and Gold Rush-era Colorado. To avoid it, North Dakota will have to diversify its economy and ensure that other industries, especially agriculture, remain strong.

“Think about mining towns in Colorado that are now ghost towns,” said Don Macke, cofounder and director of the Center for Rural Entrepreneurship, which is working with western North Dakota on economic issues. “You had places in Colorado that once had ten or twenty or thirty thousand people and no longer exist.”

When the state’s legislature reconvenes for its first session in two years this January, it will face a tug of war between the urgent needs of the future and the even more pressing needs of the present. A drive across the state makes this clear: eastern North Dakota, far from the boom, is overflowing with jobs. There, people are looking to the future; state university presidents want to make the state a destination for young, tech-savvy, highly educated workers.

In western North Dakota, the needs are more immediate. The roads are pitted with potholes. Children are homeless. The region needs hospitals, schools, new utility hookups — everything. As much as the state wants to invest in its future, it first has to solve the problems brought on by its unexpected growth.

“I’ve always been around oil, and we’ve always been in the oil field,” Swensrud said. “I can’t run down the oil field. But we worry about the land. Everywhere you look, there’s an oil well.”

Williston and Watford City: lots of jobs, not enough schools

Up close, the North Dakota economic miracle is dusty. Everything on the highway is covered with dust from the red-dirt roads pounded by thousands of semis and pickups. The pickups, the hallmark of of drillers on America’s oil lands from Pennsylvania to Texas, were once white and are now indiscriminately dusty. The pockmarked highway passes through alien, beautiful terrain: half badlands, half vast and empty plains. Oil pumps bend rhythmically, like giant praying mantises, in fields full of dead sunflowers and indifferent cattle. When the traffic gets worse, you know you’re nearing Watford City.

In Williston and Watford City, developers have thrown up the trappings of suburbia: Fuddruckers, Holiday Inn Express, GameStops, Taco Johns, the westernmost Aldi grocery store in the United States. The Applebee’s is packed on a Thursday night with weather-beaten men eating meat and potatoes in sweatshirts, and young couples with small children.

The fusion of this suburban anywhere with the wide-open landscape means there are no trees to give anything an illusion of permanence. The overall effect is not of a boom but an invasion. Williston is what it would look like if Halliburton tried to colonize the moon.

Jobs abound in North Dakota (Libby Nelson)

North Dakota had settled in for a future of an aging, declining population. The state had held steady at about 650,000 people since its sole population boom, when farmers flooded into the Dakotas at the beginning of the 20th century. Now it’s the fastest-growing state: 725,000 people and counting.

The state was unprepared for this growth. “They can’t build housing fast enough,” said Nancy Hodur, an economist with North Dakota State University, in Fargo, who has studied the impacts of the oil boom.

Western North Dakota might seem like an economic wonderland to the rest of the country: the unemployment rate is less than 3 percent. But it’s also defined by scarcity. There isn’t enough of anything: not enough workers for the fast-food restaurants; not enough houses for the influx of migrants; not enough doctors for the emergency room; not enough asphalt for the pitted roads.

Until 2011, the state sent just 11 percent of its oil tax revenue to the western counties where the oil itself was coming from. Two years ago, the legislature increased that proportion to about one-quarter. This coming January, they will consider increasing it again.

The average annual salary in Williston is now $78,000 per year, triple what it was earlier in the decade. But everything else is expensive too. In a region packed with oil fields, gas costs more than $4 per gallon. A gallon of milk at a convenience store costs even more. A one-bedroom apartment in Watford City rents for $1,900 per month; a one-bedroom in Williston will set you back even more.

Williston is what it would look like if Halliburton tried to colonize the moon

And public services are strained, which is where the state budget comes in. Municipalities can borrow on their own through bond issues, but they’re at a risk if the price of oil falls and economic prosperity evaporates. They need to share the risk with the rest of the state, Macke said.

Representatives of western North Dakota counties say they need to repair the roads, construct new utility hookups, and build new schools and hospitals. The hospital in Watford City used to be so sleepy that the sole doctor, a general practitioner with 20 years of experience, could work at the clinic across the street and run back and forth for a handful of emergency room visits each day.

Now Watford City has at least 13,000 people, and the emergency room averages 500 visits per month, said Michael Curtis, the hospital’s chief operating officer. There are more oilfield injuries. More car accidents. Lots of DUIs. Lots of bar fights.

Curtis knows lots of people miss the town’s Mayberry feel, but he prefers the boom. “I really like it,” he said. “A lot of people do not. I feel less stress and chaos than I do with the status quo.”

The hospital is soon to expand on the site of the county’s nursing home, adding a clinic with 30 exam rooms. Other hospitals in the region had prepared for years of nursing elderly patients and are now looking at maternity wards — a “paradigm shift,” Hodur said.

Much of Western North Dakota hasn’t caught up with the boom yet (Libby Nelson)

And despite the reputation of the Bakken as overrun by unaccompanied men — two-thirds of the population growth has been from men moving to the state — there are plenty of children here, too. Enrollments in local school districts have increased, particularly for the youngest children.

On a red gravel road outside Watford City, a play set with a slide perches incongruously outside a giant, warehouse-like building with hookups for mobile home water and power. It’s called an indoor RV park; it looks like what you would get if you crossed a self-storage facility with a campground. Many kids in Watford City, Williston, and nearby Alexander, a town of around 400, shuffle from trailer to trailer: temporary housing at home, temporary classrooms at school.

Forget what will happen when the oil runs out; western North Dakota is just trying to catch up with the boom itself, and to transform Williston and Watford City into places where people might want to settle down. “We need everything,” Hodur said.

As you drive south and east from the oil patch, toward Bismarck, where legislators will convene in January, the most dramatic signs of the oil boom begin to fade. The natural gas flares and oil wells disappear from open fields. By the time you get to Bismarck, the state capital, the chaos and traffic of Watford City have faded to more serene prosperity.

Everyone is hiring, and for every position. Earn $25 per hour at Sears, plus commission. Get a $600 signing bonus at a disability services agency. “Need a job?” asks the road sign at Taco Bell. “Let’s taco bout it.”

At first, this seems wonderful — almost unbelievable, as if all of the jobs the United States lacked in the recession sprouted in the shopping centers outside Bismarck. Even the state government is having trouble keeping workers, said Pam Sharp, the director of North Dakota’s Office of Management and Budget, because drillers can afford to pay so much more.

While the higher wages are good news for workers, they could be bad news for the state’s economy in the long term. Some are warning of a “crowding-out effect”: companies that work in industries unrelated to gas and oil could decide that it costs too much to employ North Dakotans and move elsewhere. The boom could strengthen North Dakota’s economy in the short term but weaken it in the long term.

The simplest example of this worst-case scenario is in Colorado and Nevada, where towns swelled to tens of thousands of people during the Gold Rush, then dried up to nothing when the resources disappeared.

Does a state with so much oil money need an income tax? A property tax?

A boom and bust so complete is unlikely in a modern economy, but experts argue that North Dakota needs to diversify its economy anyway. Relying on oil and gas extraction in particular is risky for two reasons. First, even in good years, it’s an unstable industry. Prices soar and drop — as they have this year, falling from over $100 to below $70 per barrel for Texas crude oil.

A bad year for oil prices could slow down extraction. People would lose their jobs; the state would lose its tax revenue. Back-up industries — whether that’s agriculture, manufacturing, or something else — provide some insurance against the economic swings.

In the Netherlands, the discovery of Europe’s biggest natural gas field in 1959 boosted the nation’s exports and strengthened its currency. And yet, between 1970 and 1977, unemployment increased from 1.1 percent to 5.1 percent. A stronger currency weakened other parts of the economy, because it was less competitive internationally. The giant gas field ended up leaving the economy worse off than it was before it was discovered. The Economist coined a name for the malaise: the “Dutch Disease.”

Economists worry that North Dakota could suffer from a local version of Dutch Disease, driven not by currency values but by wages. If other industries wither, the state’s economy will be more vulnerable to fluctuations in the price of oil: if oil starts to run dry or simply becomes cheaper, the state could be in for a bad year.

“It’s very, very hard right now in North Dakota to think about what the world looks like when the oil boom becomes a contraction, or if oil prices were to drop significantly more,” said Macke, of the Center for Rural Entrepreneurship. But for the state’s own long-term interest, he said, it has to.

Aside from the year-to-year swings, there’s another reason that building an economy around oil and gas is a bad idea: eventually, the oil and gas will run out. Jobs will vanish not for a bad year or two, but in the long term. State tax revenues will dwindle. And in a state dependent on the prosperity brought by drillers and extraction taxes, other parts of the economy might have atrophied and be unable to fill the gap.

That’s what’s happening in Alaska, which began using revenue from oil and gas drilling to cut checks to its residents in 1982, paying out as much as $2,069 per person per year in 2008. But the state failed to develop other industries alongside oil and gas drilling. The natural resources sector makes up nearly half of the state’s jobs. Meanwhile, the mineral extraction is becoming less productive, and checks are getting smaller.

“People don’t have to pay taxes in Alaska, and they get a check from the state,” Macke said. “The day is going to come when they’re actually going to have to tax people to pay for schools and roads and the other things everybody has to get taxed for. That, politically, is going to be a really ugly time.”

So far, North Dakota has taken few steps to spend its tax revenue. It’s a historically conservative state, and legislators typically are hesitant to spend money. The legislature meets only every other year. And just 8 percent of the oil tax revenue goes into the general fund for the legislature to spend; the rest goes into a series of trust funds.

Those trust funds are filling up. The state collected $2.9 billion in oil and gas extraction taxes last year, Sharp said. It’s projected to have a $600 million budget surplus by the time the legislature meets next year. A trust fund for oil wealth is projected to reach $3 billion by 2017, when state lawmakers can start to spend it.

Now, though, as the legislature prepares to meet in January for the first time since 2013, bigger questions are arising. Does a state with so much oil money need an income tax? Does it need a property tax? Does it need to require students to pay for higher education?

Fargo: education as economic savior?

In Fargo — 400 miles south and east of Williston and Watford City — the state’s economy feels healthy, diversified, and far from dusty. Downtown in the city of 113,000, you can taste a $13 bottle of harissa-infused olive oil and shop at a boutique with $400 designer dresses. There is wood-fired pizza, craft beer, bubble tea.

If North Dakota wants to diversify its economy, Fargo offers one potential path. One of its biggest success stories is tech entrepreneur Doug Burgum, who sold his Great Plains Software company to Microsoft for $1 billion in 2000. Burgum, now a venture capitalist, has invested in two Fargo companies, a business analytics company and a biotech company that works on vaccine development.

Like seemingly every mid-sized city between San Francisco and New York, Fargo dreams of becoming the next Silicon Valley, the next Austin, or at least the next Pittsburgh — the epicenter of a “knowledge economy” based on technology, research, and other jobs that require higher education.

The strength of North Dakota’s growing universities suggests that depending on them for economic growth isn’t entirely far-fetched. But university presidents’ plans will require support from the state legislature — as will other plans to strengthen other industries, such as agriculture and manufacturing.

At a time when other state universities are dealing with declining state funding, tuition hikes, and skeptical legislatures, North Dakota’s largest university, North Dakota State, swaggers. North Dakota is one of two states (the other was oil-rich Alaska) that didn’t cut higher education funding during the recession. And in the past few years, NDSU has combined success in sports — 13 national championships in the past three years and a football team that attracted ESPN’s College GameDay twice — with growing research prowess. Its research budget has surpassed its peers in Wyoming and South Dakota and is now close to being among the top 100 in the United States.

All this was before the oil money kicked in. The first payouts from a new state funding formula arrived in July, putting an additional $4.8 million in the university’s budget. Its president, Dean Bresciani, is now preparing to go on a faculty hiring spree. But his really big idea, shared with the University of North Dakota, is to eliminate out-of-state tuition entirely.

Fargo dreams of becoming the next Silicon Valley, the next Austin, or at least the next Pittsburgh

This would be unprecedented, but it’s not entirely far-fetched. Already, more than half of North Dakota State’s students come from outside the state’s borders, many from just across the Red River in Minnesota. Minnesota students already get in-state tuition. Bresciani predicts ending out-of-state tuition would bring a “flood of students,” since North Dakota State’s in-state tuition is less than $8,000 per year — a bargain even when compared with in-state tuition in other states.

Still, it’s not clear yet if legislators will embrace the request. The university doesn’t know how many out-of-state students would take them up on the offer or how much revenue it might forgo. The biggest risk is that North Dakota would become a stopover for college students on their way to a degree, not a long-term home: while the majority of graduates currently settle in the region, there’s no guarantee that will continue, although the state’s strong economy and high wages would presumably attract some of them.

While pumping more college degrees into North Dakota would help, it also will not be enough. Bresciani himself underlines the importance of strengthening agriculture, the state’s historically most important industry. Macke, of the Center for Rural Entrepreneurship, suggests North Dakota look to its neighbor for an example.

Like western North Dakota, northeastern Minnesota’s Iron Range has an abundance of resources — in this case, iron ore. Iron has been mined in the region for more than a century, and since 1941, the region has been planning for a future without iron ore. In 1977, it created a trust fund meant to develop other industries.

Over the years, that trust fund has helped more than 200 businesses, mostly through low-cost loans. The fund was used to entice a plastics company away from Wyoming to open a facility in northeastern Minnesota, to  build helicopter pads at area hospitals, to help a logging company expand, and to design a community college curriculum to train utility workers.

And while northeastern Minnesota’s economy isn’t the picture of health that North Dakota’s is, the diversification seems to have worked. For 25 years, employment and earnings in the mining industry have fallen. But the rest of the economy has grown. In the 1970s, mining was responsible for almost half of all personal income in some counties; it has since shrunk to, at most, 13 percent. Other well-paying industries have grown: medical services, government, and finance — jobs that require educated workers.

“Taking part of that tax and investing it in a trust fund to support economic diversification has really made a difference in the Iron Range,” Macke said. He suggests that North Dakota begin to use its trust funds in similar ways.

But North Dakota is a conservative state that has historically had a small, conservative legislature. So far, that caution has served the state well financially, through choices such as putting most of the money in trust. But the time is coming when the legislature will have to decide how to spend the money from that trust. That will require a cultural shift.

“If you don’t like the idea of government being at the center … it begs the question of OK, if it’s important to do, then who’s going to do it?” Macke said. “I think that’s going to be one of the heartburn issues.”

Other states devote the income from their trust funds to higher education: Texas has a $14 billion oil and gas trust fund to finance higher education; part of Wyoming’s oil and gas fund also helps students pay for college.

But there are also people who want to use the extra money to help alleviate the tax burden in the state. Republicans in the state legislature are preparing to propose lowering the state’s personal income tax to 0 percent, via a bill that failed the last time around. Other proposals have involved eliminating the property tax.

Even in a state with a seemingly endless boom, resources aren’t infinite. Before, “it was easier to say no,” said Sharp, the OMB director. “Everyone starts the conversation now with, ‘We know the state has a lot of money.'”