Oil closed negative for the first time on April 20th. The steep collapse left analysts on CNBC scratching their heads as it was happening in real-time. What happens to producers? What will it mean for jobless rates in North Dakota? How will this impact alternative energy like ethanol and biofuels? A lot of questions with few immediate answers. Another question NDx keeps coming back to, what does it mean for North Dakota’s budget?
The 2019 Legislature set the two-year budget with the expectation that oil will average $48/barrel. 2020 started with the price hovering around $62/barrel. On April 20th, it closed negative $37. The reason for the dramatic collapse is because lack of demand and full storage. Rightfully, people are limiting travel to flatten the curve of covid-19. Vehicle traffic is light, air traffic is even less, and major purchasers have cut back. That unprecedented drop in demand has led to high volumes being stored. Storage is running out and the agreed-upon cut back from Russia, OPEC, and the US seems to have been reached too late.
Yes, oil prices appears to rebound after May. But current expectations have that rebound settling around $20. Still less than half of what was budgeted for in ND. Additionally, that price is with the hopes people will begin travelling again to increase demand for oil and gas. That is not entirely guaranteed.
Our current state budget stays effective for another year. It will be tough to live up to the promises and hopes of that budget as oil and sales tax collections drop. In a previous post, NDx broke down the likelihood of the promises from “operation prairie dog” will be missed. What can state government do to mitigate the impacts for the current budget and beyond?
There are a couple of things to consider. When it comes to oil and gas activity, the Industrial Commission chaired by Governor Burgum could look at easing rules and regulations on oil development. Some would argue the state has historically been lenient on the oil and gas industry in the first place. The Commission is having an emergency meeting today, April 21st to discuss an emergency order to classify oil and gas produced at a loss as a waste.
Aside from industry-specific changes from the Commission, there needs to be a push to activate the Bank of North Dakota. BND has recorded record profits year after year. As the federal government fell short in funding relief programs, the BND can provide bridge funding for ND businesses. They can do so by partnering with community banks across the state. As the only state-owned bank in the country, BND should be utilized for North Dakotans now. Burgum needs to get the ball rolling.
The Legislature will likely need to get back to work to make sure the current budget is sustainable for another year. A special session has not been ruled out by lawmakers nor the Governor. Priorities may need to be reevaluated and dollars moved around to get us to July of 2021. That discussion can start in the Legislative Management Committee in conjunction with the Budget Section. This is yet another example that ND should consider meeting briefly every year rather than once every two years to budget based on volatile commodities.
Long term, there needs to be a robust plan to activate the Legacy Fund. It seems the vast majority of North Dakotans agree the time to tap the “rainy day” fund is now. That doesn’t make the task any easier to get something done. Two-thirds of the Legislature need to approve access to the Legacy Fund. North Dakota’s Legislature has been known to fall short of approving popular ideas on a simple majority.
The Legislature meets again in January 2021 to budget for the following two years. We will need to have a collective plan for the Legacy Fund going into that session to achieve the two-thirds majority requirement. Broad support from North Dakotans will be a necessity. What would you like to see done with the Legacy Fund?
North Dakota is facing very unique challenges. Like other states, we’re battling a health crisis that has caused economic concern. Yet, we’re also a top oil-producing state that will be impacted more than others from the price collapse. Tens of thousands of unemployment claims have been filed in four weeks. The open signs stay dark and doors remain locked to our small businesses. Just as we all have a role to play in beating covid-19, we all have a role to play in rebuilding our ND economy and businesses.
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