The oil and gas industry’s story is one of boom and bust cycles: new discoveries and new players coming online, and economies rising and falling with energy demand following like a tail behind a dog.
The latest round was triggered by a new method of retrieving oil and gas deposits that were previously difficult to reach. Fracking (short for hydraulic fracturing) has its share of detractors, but there can be no question that it had a dramatic effect on production here in the U.S. Oil production hit a peak of 9,700 barrels per day in April 2015, just shy of the all-time high of 10,044 reached in January of 1970.
But then we saw a standoff between major producers, in which none of the oil and gas giants were willing to reduce production. Prices had nowhere to go but down, and soon the profits began to dry up, even as the oil kept flowing.
That leaves places like North Dakota, which saw unprecedented growth courtesy of the Bakken shale formation, with a case of economic whiplash that will take a long time to recover from. As another oil rig closed down in the state last week, the overall number of oil and gas rigs in the U.S. dropped to 406, an all-time low. A year ago that number was 888.
In 2014, North Dakota’s GDP hit $50 billion, more than double the 2002 level. Over 80,000 people came into the state to get in on the action. Then, the state’s economy dropped from the first to the last in the nation. Monthly oil revenues down to about a quarter of the $333.8 million they hit in 2014, and tax revenues are also down — putting a strain on the state budget, as hastily constructed apartment complexes now sit vacant.
Of course, North Dakota isn’t the only place hit by the bust. Around the world, remittances sent home by migrant oilfield workers fell dramatically, impacting local economies in places like Turkmenistan and Uzbekistan, where workers often send checks home from Russian oilfields. Even in oil-importing countries like India, the economic benefit of lower oil prices has been largely offset by the decline in remittances. This could have a significant impact on migration patterns.
So, what are some of the takeaways from this chain of events?
For one thing, in an increasingly global economy, coordination of supply in the face of rapidly increasing productivity is crucial if economic sustainability is to be maintained. At the same time, concerns over environmental sustainability have likely contributed to this behavior. Growing calls to “keep it in the ground,” raise the prospect of substantial oil and gas reserves becoming stranded assets. Many decision-makers have chosen to get whatever they can for the oil, viewing even those paltry returns as better than nothing.
But with high supply, along with reduced demand due to more efficient motor vehicles and the rise of alternative sources of energy, oil prices remain low. These are trends that will certainly continue, which should be enough to convince energy companies to rethink their business models and revise them into something more sustainable.
Image credit: SMU Central Library: Flickr Creative Commons