Oil prices are coming down. While that’s good news for consumers, the rural communities that depend on oil revenue to pay for local government services and infrastructure may have a different experience.
Falling oil prices could mean millions of dollars less in tax revenue for local governments in oil-producing regions, even as counties and municipalities have to continue paying for the impact of oil boom.
To get a handle on the possible impact of falling oil prices on local government revenues, I looked at the difference in tax income that occurs when oil prices drop from $98 to $78 a barrel for in North Dakota’s Bakken shale oil fields. That’s comparable to the change we’ve seen in the recent decline of oil prices.
The change in price could result in about $200 million less for local governments over five years, and $350 million less for state government. Losses for that state’s permanent investment fund would be even higher.
Those figures include only an estimated 2,500 new wells and don’t include lost revenues on the state’s existing wells, which number in the tens of thousands.
States are already stingy with sharing revenues with local communities to fund infrastructure and services required during the oil boom. And local governments need oil revenue to pay for annual, recurring expenses even as some states have invested in permanent funds to meet long-term needs. High oil prices can mask these problems in fiscal policy, but today’s lower prices—if they persist and if drilling continues apace—may expose these weaknesses. Communities will have less money to deal with the same intensity of industrial and population-growth related impacts.
To understand how it might play out, we revisited an earlier report to see how local revenue could change.
The chart at the top shows the decline in revenues associated with the change in oil price. Here’s how we reached that conclusion.
The graphic below shows how production at an average well in North Dakota’s Bakken shale fields declines over time. The data is from DI Desktop and the Duke Energy Initiative. (Drillinginfo” and “DI Desktop” are trademarks of Drilling Info, Inc. and, along with the Drillinginfo data reproduced herein, are used with permission.)
The decline in monthly production (represented by the blue line) is typical of shale wells, which have high initial production that declines steeply. The dramatic decline means that more wells are needed to maintain production compared to conventional oil fields. North Dakota, for example, completes about 2,500 wells annually, and most of these are required just to maintain the current level of production.
Next, we modeled how North Dakota’s tax policy applies to an individual well. Using the two different prices, $98 (dark green line in the chart below) and $78 per barrel (light green line), we can predict the tax revenue. As prices drop by $20 per barrel, North Dakota will receive half a million dollars less in revenue from the well over the first five years of production.
Revenue from the production tax and extraction tax is distributed to a variety of purposes, including direct distributions to local governments (local share), deposits into the state’s Legacy Fund (permanent savings), and some is used for direct property tax reductions (tax expenditures). The figure at the top of this story shows the dollar amount distributed to these purposes based on revenue from an average well under a high price and a low price scenario.
In North Dakota, local governments could see about $80,000 less from each well over five years at $78 compared to $98 per barrel. Multiply that by the 2,500 wells completed annually, and the potential revenue impact is about $200,000 million for these new wells. That does not count the tens of thousands of already producing wells that pay annual severance taxes, too.
North Dakota and many other western legislatures will meet in January. Many states have used severance tax windfalls to fund general operations or to lower taxes. Falling prices should refocus state and local leaders on understanding the needs of shale communities and what states can do to help them benefit amid continuing uncertainty.
Mark Haggerty is an economist at Headwaters Economics, an independent, nonprofit research group that focuses on the Western United States.