Harvesting the Bakken

Oil in North Dakota is big news. News anchors across the country can now find the state on the map without needing help. Rand McNally is probably not going to omit the state from their next atlas as they did in 1989. The oil boom in western North Dakota gets regular coverage by everyone from the “New York Times” to the pages of “Newsweek” and the “Washington Post.” It would be a subject difficult to ignore.

Our state’s check book balance is the envy of the nation, thanks to the oil deposits left deep under the hills and buttes of the West millions of years ago. The money is a blessing and a challenge at the same time.

We’ve been able to increase state funding to schools. We’ve been able to put money away for a rainy day–lots of rainy days. Our legislators have been deluged with good ideas for ways to spend money. Should they vote to reduce sales taxes, property taxes, income taxes? Should we increase spending on infrastructure, on law enforcement, on health care for the poor and near poor, on colleges and universities, on salaries for state employees? Those who make these decisions may find it easier to be broke and say, “Sorry, there is no money,” to everyone. Setting priorities among many valid and good ideas is more difficult.

One of the ideas that seems to have become a regular point of discussion for our every-other-year legislature is simplifying and reducing our state’s oil extraction tax. The subject was hotly debated in the last session and is one of the first proposals put before lawmakers in 2013.

Current oil taxes include a gross production tax rate on oil of 5% of the gross value and an oil extraction tax rate of 6.5% of the gross value; 4% if the well qualifies for a reduced rate; 2% from qualifying wells in the Bakken formation; and 0% if the well qualifies for an exemption. The extraction tax varies depending on the average price of oil, giving oil companies a reduced rate if the price of oil drops below a current trigger price of $50 per barrel. The reason for the decreasing rate being tied to the price of oil is to encourage production as the price of oil drops to near the cost of drilling.

The oil industry wants their taxes restructured. Uncertainty about the level of taxes and the complexity of the structure is cited as the reason. Oil companies would like the state to simplify and reduce the taxes. They say they are willing to give up the sliding scale of taxes which are tied to price. State Department of Mineral Resources Director Lynn Helms warned lawmakers last week not to raise taxes or some oil companies could move to other parts of the U.S. Other proponents of the tax decrease also warn that North Dakota must keep our taxes competitive with states like Montana, Wyoming and Alaska. One proposal would establish a declining tax rate with increasing numbers of barrels of oil extracted.

I am mystified by the arguments for reducing oil extraction taxes. I am suspicious that the oil industry is fairly certain that the price per barrel is not likely to go below $50 any time soon. For more than a dozen years, in spite of ups and downs, the price of crude oil has steadily increased. Giving up the safeguards of a reduced tax rate on oil less than $50 per barrel is not a compromise if the industry is reasonably sure that the price is headed on a general upward incline.

The argument that we need to be competitive with other states’ tax rates is also curious. The same argument is used in Montana, Alaska and Wyoming by oil industry lobbyists trying to extract more favorable taxes from those states. Some economists have studied tax rates and incentives and found that neither has much affect on the number of wells operating in a state. Factors with a much greater affect include the price of oil, labor costs, transportation costs, and the cost of extracting the oil. Are states being sucked into a game of pitting one against the other to the benefit of the oil industry?

This is a one-time harvest. When our oil is gone, it is gone forever. We are not making any more. Yes, technology will find ways to suck oil from deeper and more difficult reserves, but only at ever increasing costs. Estimates of the time needed to extract all the oil in the Bakken range from 30 to 50 years to a couple of centuries. The truth is at some point, the reachable and affordable oil will run out.

Why, then, would we encourage the industry to extract oil more quickly by reducing taxes as the number of barrels a day increases? Why would we decrease taxes for increased production of a finite resource? Is it wise to suck this ancient gift of the earth out of the ground without regard for the generations that follow us and without regard for the mess being left behind?

Our legislators should not be fooled by threats of the oil industry pulling out and leaving behind the oil under our state. They should not be pulled into a false competition with other state tax departments. It is their job, and the job of the State Department of Mineral Resources, to protect the interests of the citizens of North Dakota. They should not be putting the interests of the oil industry ahead of the future well-being of our state. We should demand transparency of industry lobbyists’ activities attempting to influence the outcome of legislative decisions.

Our grandchildren deserve no less.

Copyright © 2013 Janet Jacobson and Sustaining the Northern Plains