Oil boom severely straining North Dakota economy

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New oil well
Thousands of new oil wells pumping in western North Dakota, including this one in Mountrail County in Sept. 2010, are contributing to a boom in the state's economy. But it's rapid growth in some sectors has thrown it out of equilibrium, economy watchers say.
MPR File Photo/Dan Gunderson

A record amount of oil is flowing out of western North Dakota, and unprecedented money is flowing into the state.

The state starts the new year with a budget surplus of $800 million and growing. Income per person in North Dakota is now above the U.S. average for the first time since the 1970s.

But despite the apparent good news, the growth is causing severe strains in the state's economy.

North Dakota Petroleum Council President Ron Ness did not anticipate the level of spending by oil companies.

"The investment we have seen over the past 18 months has just completely been staggering," Ness said.

Ness said that investment includes $3 billion in natural gas pipelines, $1 billion in oil pipelines, and more than $1 billion a month drilling new oil wells.

About 200 rigs are drilling new oil wells in North Dakota. The state is producing 500,000 barrels of oil a day. This year, North Dakota will likely move into second place among oil-producing states, behind Texas.

STRONGER REGULATION

Rapid growth in oil drilling brought calls for stronger regulation of the industry.

This year the state of North Dakota plans to implement about two dozen new regulations which Ness said will cost the oil industry $400 million a year.

"It's very significant," Ness said. "The biggest changes we've maybe ever seen in North Dakota in terms of regulatory action. Industry has essentially acknowledged that we can accept those because as activity changes, regulations have to change with that."

The Environmental Protection Agency is also considering new regulations on hydraulic fracturing to protect water supplies. Fracking is a critical part of recovering oil in North Dakota.

State officials say in North Dakota, fracking happens two miles below the surface, far from any groundwater. The state Legislature set aside $1 million to sue the EPA if new regulations adversely affect the oil industry.

A FUNDAMENTAL CHANGE

Oil is not the biggest economic sector in North Dakota. Agriculture still accounts for about one-third of economic activity, compared to about one-quarter for energy.

But David Flynn, director of the University of North Dakota Bureau of Business and Economic Research, said the growth in the energy sector is fundamentally changing the state's economy.

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He said oil towns like Williston are growing beyond anyone's expectations.

"We could talk about triple-digit growth in retail sales in some quarters," Flynn said. "It's incredible the level of growth that they have been seeing in the last couple of years. I don't think anybody would have necessarily predicted it."

Flynn said that rapid growth has the thrown the economy out of equilibrium. He said high demand combined with a serious shortage of workers is putting a lot of pressure on businesses.

"McDonald's is paying $10, $12, $15 an hour. Mall food courts can't open until 3 or 4 o'clock in the afternoon when high school students get out of class," he said. "You're seeing a real issue with labor supply in western North Dakota."

The state allocated nearly $1 billion for infrastructure, like roads damaged by heavy energy-related truck traffic. Counties struggle to find enough workers to build or repair roads because they can't compete with the paychecks workers earn in the oil field.

Flynn said it will likely take three to five years for any kind of economic balance to return to the oil patch.

HOUSING ISSUES

The problems have spread to the housing sector. While home prices continue falling nationally, Flynn said rents in the North Dakota oil patch have tripled in some areas.

Those rent increases are forcing some longtime local residents who don't work in the oil industry out of their homes.

Vickie Steiner, executive director of the North Dakota Association of Oil and Gas Producing Counties, said people are living in campers and cars because there are simply not enough homes or apartments.

"The housing market is struggling to catch up," Steiner said. "I would say in 2012 we're still probably going to see that problem, just because of the sheer numbers of people moving into the area."

Steiner said there are lots of downsides to the huge economic opportunity that comes with an oil boom. Communities struggle with the frenetic pace of growth. Crime rises, and so does uncertainty.

Like many western North Dakota residents, Steiner has seen oil booms before. She remembers the most recent oil boom that busted in the 1980s.

"My husband and I personally lost a little bit of money during that oil bust ourselves," she said. "You still remember the sting of the last oil bust, but I think definitely the longer it's here the more confidence we have with it."

Steiner said 2012 is likely to be a year of hanging on for the ride as this oil boom heads into uncharted territory.

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