Despite N.D. budget cuts, some don't expect repeat of 1980s
BISMARCK -- Falling commodity prices and state budget cuts may be prompting some North Dakotans to fear a case of deja vu is coming on. In some ways, the economic slowdown the state is now experiencing mirrors what it went through in the 1980s. T...
BISMARCK -- Falling commodity prices and state budget cuts may be prompting some North Dakotans to fear a case of deja vu is coming on.
In some ways, the economic slowdown the state is now experiencing mirrors what it went through in the 1980s. That era saw oil prices and farm incomes drop, which rippled to the state government budget and to the economy as a whole.
Falling oil and farm commodity prices hit the state again earlier this month when Gov. Jack Dalrymple, a Republican who has been in office during historically good times in North Dakota's oil and agricultural industries, ordered budget cuts in order to help cover a $1 billion revenue shortfall.
But researchers, politicians and industry officials say today's economy is different than the one that slowed in the 1980s. Yet some also acknowledge the nature of North Dakota's commodity-based industries means it's difficult to predict the future with much certainty.
"After observing this for 40 years, no one has a good handle on what is going to happen. An educated guess is the best you can do," Ray Holmberg, a Republican senator from Grand Forks who has been in the Legislature since 1977, said in an interview.
North Dakota saw a steady increase in oil activity in the late 1970s, and it surpassed 100,000 barrels of oil produced daily in early 1980. But oil prices soon dropped, and the number of drilling rigs followed.
Kathy Neset, president of Neset Consulting in Tioga, N.D., remembers the early 1980s as an abrupt stoppage in oil activity.
"It impacted so many people, and there was no such thing as a slowdown--it was a screeching halt," she said. "You can hear the doors slamming when they closed and rigs going down where they stood."
The most recent boom is different, Neset said, due to technological advances that are making the oil industry more efficient.
"It was very machinery, rig, personnel-intense because rigs are so much less efficient than they are now," Neset said. "The industry as a whole is so much more efficient, smarter, safer, I say even more professional than we were in the 70s and 80s. I think this is a very resilient oil field that has been able to reinvent itself technologically."
Ron Ness, president of the North Dakota Petroleum Council, said the oil activity in the 1980s was "solely generated as a result of a high price for that time for oil." That meant when prices dropped and the state increased taxes, "the investment just virtually all went away and really never came back," he added.
Today, "the success rate of finding oil is 99 percent when you drill a well," Ness said.
That doesn't mean that falling crude oil prices aren't hitting the state's oil industry today.
The first purchase price for North Dakota crude oil peaked at $126 per barrel in 2008, and hovered between $80 and $100 for most of the time between 2011 and the end of 2014 before dropping to $37 in November, according to the U.S. Energy Information Administration. The state's rig count on Friday was 38, down from 127 a year prior and 186 a year before that, according to the North Dakota Department of Mineral Resources.
"If you're one of the 20,000 or so people who have lost their job, it doesn't really matter whether it was the 80s or today," Ness said.
By the numbers
Oil industry officials see differences in technology between the 80s and today, and oil production figures show the recent boom was unlike anything the state had seen before.
North Dakota reached a peak of roughly 148,000 barrels of oil produced a day in mid-1984, but that's a paltry figure compared to recent years. The state has been producing more than one million barrels per day on average since early 2014, according to the state Department of Mineral Resources.
That rapid rise in oil activity helped transform North Dakota into an economic powerhouse almost overnight. The state's unemployment was consistently lowest in the country, and it added thousands of jobs.
North Dakota's employment reached 410,367 in January 2015, up from 342,038 one decade earlier, according to figures provided by Rob Grunewald, an economist at the Federal Reserve Bank in Minneapolis. Employment dropped throughout 2015 to 399,708 in November, according to those figures.
Both periods of oil activity showed an increase in the state's employment, but those oil jobs seemed to have taken on more importance recently. Over the past four years, mining jobs made up almost 13 percent of private nonfarm income, while it averaged 7 percent in the early 1980s, according to David Flynn, director of the Bureau of Business and Economic Research at the University of North Dakota.
Oil wasn't the only industry to fall on hard times in the 1980s. Agriculture, which was the leading industry in North Dakota's economy for most of the state's history, hit a downturn as well.
That bust came after farm income grew rapidly in the 1970s, "while at the same time a ready availability of credit caused farm debt to rise sharply," a Federal Deposit Insurance Corp. report states. But then interest rates rose and export demand dropped, farm income slumped and "prices for farmland began a dramatic contraction," the FDIC reported.
More than 30 years later, farmers in North Dakota are seeing net incomes drop from a high of roughly $3.7 billion to a little more than $2 billion between 2011 and 2014, according to the U.S. Department of Agriculture.
Still, Frayne Olson, a crop economist and marketing specialist at North Dakota State University, doesn't believe a similar long-term slump in agriculture will return. He pointed to expanded markets in Asia, the increased importance of ethanol, and new banking regulations.
"We've got low prices right now, but these are not going to last for years and years and years like they did in the 80s and early 90s," Olson said.
Brian Johnson, CEO of the state's largest agricultural bank, Choice Financial, said farmers have gotten better at production, cost control, and diversifying crops over the years. He added farmers seemed to have "higher debt levels across the board for operations" in the 1980s.
Still, Doug Goehring, the North Dakota agriculture commissioner, has some concerns.
"The real reality is one or two bad years in farming right now, even one really bad year, can take you out of the game," he said. "If this doesn't change in the next 18 months, we're going to see some dramatic effects on the farm in our rural countryside."
North Dakota tax collections have grown rapidly in the past few years, from $1.7 billion in fiscal year 2008 to $5.9 billion in 2014. That's fueled more state spending, with general fund appropriations racing from $2 billion in the 2005-07 biennium to almost $6.9 billion in the 2013-15 cycle, according to North Dakota Legislative Council.
The state also saw a rise in tax revenues in the late 1970s and early 1980s, but it wasn't as rapid of an increase as recent years have brought, according to figures provided by the North Dakota Office of the State Tax Commissioner. The state then saw a 19 percent decline in tax collections between fiscal years 1985 and 1987 before picking up again.
North Dakota has made a number of budget changes since the 1980s.
Among them was constitutional amendment creating the foundation aid stabilization fund, which means "if there is a downturn in the economy, the school payments are constitutionally protected," Holmberg said. He tied the implementation of that fund to the economic hardships of the 1980s.
Holmberg predicted there will be a "larger interest in increasing the savings accounts, because once you've been bitten like this ... you re-evaluate and retrench."
Ward Koeser, the former mayor of Williston in North Dakota's oil patch, said the city took on roughly $28 million in bad debt in the 1980s after residential developers walked away from that bust.
"I don't think we're going to see that happen this time," he said. "We required the developer to put in the infrastructure. Obviously that's painful for them, but I think it spared the city that issue of having that bad debt."
While political leaders point to initiatives like the emerging unmanned aerial systems industry, which is taking flight in Grand Forks and elsewhere in the state, as pointing to a more diverse North Dakota economy, retired state lawmaker Earl Strinden said commodity cycles continue to affect the state as a whole.
"We're very much a victim of what other forces can do regarding the price of oil and then also the demand of oil," he said. "We're in an agricultural state, so what happens with the price of agricultural products bears directly on what we can expect on economic activity."