For discussion

July 2013

Economic contribution of the petroleum industry in North Dakota

Dean Bangsund is a research scientist with NDSU’s Department of Agribusiness and Applied Economics. He discusses the recent rapidly increasing economic development in the state as it pertains to the oil and gas industries, along with the challenges it brings.

The shale oil formations in the Williston Basin continue to garner local, state, and national headlines. North Dakota has been a top-10 oil-producing state for over a decade, witnessing unprecedented growth.  As of 2012, our state ranked second in oil production behind only Texas.  To those familiar with North Dakota’s economy, the petroleum sector has always been an important part of the state’s economic base.  Recent work by state agencies, planners, and researchers has produced a better understanding of the potential rate and extent of oil field development.  Current estimates reveal that elevated levels of oil field development will continue for over a decade, resulting in a petroleum industry that is considerably larger than historical levels.  Some estimates place the state having as many as 40,000 oil wells in the next 25 years, implying that the petroleum sector is likely to increase its importance and remain one of the state’s largest industries for a considerable period.  As North Dakota continues to adjust to a growing economy, policymakers, legislators, and business leaders rely on economic impact studies to better understand the economic effects of the expanding petroleum industry. 

So what is an economic impact study?  Economic impact analysis can take many forms, but the studies generally attempt to measure how a policy, program, event or industry affects an economy.  In North Dakota, we used an economic contribution approach to measure the overall size of the petroleum industry in terms of economic output, jobs, tax revenues, and personal income.  These studies rely on survey data that detail how various operations and activities of the industry spend money and generate revenues to governments, individuals, and businesses in the state’s economy.  We then apply those spending patterns to economic models to estimate how the industry’s purchases of goods and services influence overall business activity in the state.

Four economic contribution studies focusing on the petroleum industry in the state were recently conducted.  In each study, the petroleum industry was divided into exploration and development, oil and gas production, transportation, and processing of crude oil and natural gas.  The dollars injected into North Dakota’s economy from exploration and development, the segment of the industry responsible for drilling, fracking, and completing oil wells, grew by over 1,100 percent from around $500 million in 2005 to $6.1 billion in 2011.  The segment of the industry responsible for oil and gas production increased its economic size by nearly 290 percent from $1 billion to $4 billion of in-state spending.  Transportation of crude oil and natural gas, along with crude oil refining and natural gas processing, have expanded by 220 percent.  Overall, when all segments of the industry are combined, the petroleum industry increased by 500 percent from around $1.7 billion in direct impacts to $10.6 billion over the 2005 to 2011 period. 

These huge injections of dollars into the state’s economy are generating considerable business activity.  It was estimated that an additional $16 billion in secondary economic activity occurred in 2011 as direct expenditures by the petroleum industry work their way through the economy.  The study also indicated that the industry directly and indirectly supports about 60,000 jobs in the state and produces over $2 billion in direct and indirect in-state governmental revenues.  The end result of this large increase in overall business activity has been growth in jobs, personal income, and governmental revenues.  These economic benefits are playing a vital role in stimulating real growth in the state.  North Dakota now has one of the fastest growing economies in the United States, due in part to the growth of petroleum activities, but also to the overall size and health of the state’s agricultural enterprises and ongoing local and state efforts to create growth in other sectors.

All this economic expansion is not without consequences.  The state has tremendous housing needs, and those needs are perhaps most acute in the Williston Basin where a large workforce has recently been added due to expansion of the petroleum sector.  The state has very low unemployment and will need to attract additional workers to address growing labor demands as the economy expands.  Attracting workers to the state will present challenges so long as housing availability and affordability remain an issue.  Transportation systems in western North Dakota were not designed to handle the current volume of industrial activity and population, and will need substantial financial investments to address increased maintenance and improved traffic flow.  Growing populations have implications for the provision of public services, such as education.  For decades, most of the state’s rural school districts dealt with declining enrollments, and rural districts in western North Dakota are not prepared to handle the current rapid expansion of student enrollments.  Other development issues can be linked to sewer and water capacity and provision of medical, personal, and public services, such as fire and rescue and law enforcement.

Many challenges remain for the state to respond to its economic growth, and part of the challenge will be to respond in a manner that retains economic opportunity for future generations while providing for a quality of life for current residents.  Arguably, the state is in an enviable position to address positive economic change, and most would rather deal with the pains of economic expansion over the problems associated with a stagnating or declining economy.  Either way, we are living in exciting and historically relevant times for the state of North Dakota.

See more of Dean Bangsund’s research with NDSU’s Department of Agribusiness and Applied Economics: reports and staff papers.

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