"When you see [an oil] rig like that sitting in the yard, that just means that there's no longer demand to keep it in the field, and there's just not enough work out there for you."
—Danny Morgan, Morgan Well Service1
Oil is important to the economic development of the United States: It powers much of the U.S. economy, and its price fluctuations can influence inflation2 and unemployment. However, the impact of oil prices is often felt more directly (both positively and negatively) by local economies with close ties to the oil industry.3 For example, the recent decrease in oil prices has resulted in an estimated 75,000 worker layoffs in the oil industry, and more are expected.4 As such, it might seem that falling oil prices are harmful to the economy, but most economists believe the recent decline in oil prices will promote economic expansion.5
Regional Expansion During a National Recession
The recent oil industry boom was largely due to the emergence of two new oil drilling technologies—horizontal drilling and hydraulic fracturing (or "fracking")—and high oil prices. This boom started during the Great Recession, amid high national unemployment (10 percent in October 2009), and was felt most dramatically in western North Dakota, where employers had difficulty finding enough workers to fill the many jobs created by the boom.
Distance and the housing crisis restricted the flow of job seekers to the job opportunities in North Dakota. North Dakota is relatively isolated from large population centers; Minneapolis-St. Paul, the nearest large metropolitan area, is over 500 miles from the Bakken Formation.6 Further, the states that had very high unemployment rates during the recession (the most job seekers)—Arizona, California, Florida, and Nevada—are all well over 1,000 miles away. The housing crisis made it difficult for many job seekers to move to find employment because plunging housing prices left many homeowners "underwater"—that is, owing more on their home loans than they could recoup by selling the house. As a result, they were financially tied to their current location.
Resources and Employment in Boom Times
The boom in North Dakota that produced vast quantities of one valuable resource (oil) left employers searching for another valuable resource: labor. The demand for labor is derived from—or determined by—the demand for the goods and services that the labor produces. That is, the demand for oil drilling services determines the demand for workers in the oil services industry. The combination of new oil drilling technology and high oil prices provided oil companies with an incentive to drill new wells. Explorations ramped up in 2006 with the discovery of the Parshall oil field, 7 which led to growing interest in the larger Bakken Formation. Oil production in North Dakota grew at least 12-fold from January 2006 (99,000 barrels per day) to December 2014 (1,227,000 barrels per day).8 The relative scarcity—that is, the demand for a resource relative to the available supply—of workers in western North Dakota set the stage for regional labor shortages and higher wages.
NOTE: The U.S. unemployment rate rose to 10 percent during the 2007-09 recession (blue line) and has since decreased to 5.5 percent. Meanwhile, the North Dakota unemployment rate peaked at 4.3 percent during the recession and decreased to a low of 2.7 percent (April 2014). The gray bar indicates the 2007-09 recession as determined by the National Bureau of Economic Research.
SOURCE: FRED®, Federal Reserve Economic Data. Federal Reserve Bank of St. Louis: US. Bureau of Labor Statistics, Civilian Unemployment Rate [UNRATE], Unemployment Rate in North Dakota [NDUR]. http://research.stlouisfed.org/fred2/graph/?g=13WX; accessed March 31, 2015.
2009 October Unemployment Rate by County
NOTE: North Dakota experienced a lower-than-average unemployment rate during the 2007-09 recession. This GeoFRED® map shows the unemployment rate by county in October 2009.
SOURCE: Federal Reserve Bank of St. Louis. "Editing the Legend and Changing Colors by Mapping an Oil Boom." https://www.stlouisfed.org/~/media/Education/Lessons/pdf/GeoFRED-Mapping-an-Oil-Boom.pdf, p. 8; accessed March 12, 2015.
The impact was most dramatic in Mountrail and Williams counties in North Dakota. While the national unemployment rate rose to 10 percent, the unemployment rate in Mountrail County fell to 3.3 percent in October 2009 and continued to fall—all the way to 1.1 percent in October 2014.9 In neighboring Williams County, the unemployment rate dropped below 1 percent.10 Over time, workers moved to the area—the population in Mountrail County increased 47 percent in seven years—from 6,376 in 2006 to 9,376 in 2013.11 As might be expected, incomes boomed along with the oil industry: Per capita income more than tripled, from $26,219 in 2006 to $90,614 in 2013.12 In Williams County, per capita income peaked at $121,459 in 2012.13
The Economic Impact of Falling Oil Prices
High oil prices sustained the boom for a while, but the recent decline in oil prices has deflated the local economy. On July 28, 2014, prices reached $105.68 per barrel, and by January 28, 2015, they had fallen to $44.08 per barrel, a 62 percent price decrease in only six months.14 While most operating wells continue to produce, the dramatic decrease in oil prices has greatly reduced new drilling. Oil rigs that were used 24 hours a day for months at a time are now idle, as are the workers who operated them. In April 2015, North Dakota reported 94 active oil rigs, down from 217 in the spring of 2012.15 This change has important implications for the state's economy; reports estimate that each operating rig supports 120 full-time jobs.16
Clearly, falling oil prices hurt oil companies and workers in oil services industries. But they do benefit the general economy. Money that consumers and businesses might have normally spent on fuel for heating and transportation can now be spent on other goods and services (or saved). For example, the U.S. Energy Information Administration estimates that U.S. households will spend (on average) about $750 less on gasoline in 2015 compared with 2014.17 This increase in consumer disposable income can spur consumer demand for other goods and services. On net, these economic gains that arise from increased consumer spending tend to outweigh the effects of a reduction in oil drilling activity. In addition, lower oil prices are associated with factors such as lower overall inflation and lower (nominal) interest rates, which might increase demand for consumer spending on automobiles and housing and business investment on capital goods. 18
Fluctuations in oil prices can produce booms and busts in rural areas that result in fluctuations in the demand for labor. North Dakota is a case in point: Rising oil prices resulted in a flurry of drilling and the hiring of oil field workers, and the recent collapse of oil prices has seen a parallel decrease in drilling and employment. Oil prices also have implications for the larger economy. Although falling oil prices hurt some local economies, they are a net positive for the economy.19
Relative scarcity: Demand for a resource, good, or service relative to the available supply of that resource, good, or service.