Two oil and gas boomtowns can tell us a lot about the economy

Reuters/Akhtar Soomro

Over roughly the past 10 years, the United States has experienced remarkable growth in the production of natural gas and oil.

This growth has taken place across dozens of regions, from the scrub of west Texas to the plains of North Dakota to the pastoral hills of Appalachia.

It has sparked economic growth, raised environmental concerns and reduced energy prices.

But how does the oil and gas industry affect the financial well-being of the communities where it operates?

Over the past three years, we have looked deeply into this question, traveling to 21 regions across the top 16 oil- and gas-producing states.

We interviewed more than 200 officials from over 150 local governments (mostly cities and counties), analyzed financial records from each of these government entities and examined how policies have shaped their experiences.

Our results illustrate the difficulty of generalizing from one region to another, as each community experiences oil- and gas-driven growth differently. Despite the differences, our findings can offer lessons for regions where oil and gas activity – an industry marked by booms and busts – is likely to play a major role in the economy for decades to come.

A tale of two boomtowns

Most coverage of the recent boom and subsequent downturn of U.S. oil and gas production has focused on parts of North Dakota, Pennsylvania and Texas. But several other regions experienced similar booms just a few years earlier, and the diverging stories of two cities – Rifle, Colorado and Farmington, New Mexico – offer insights into what may lie ahead for other regions.

Rifle lies along Interstate 70 on the Western Slope of the Rocky Mountains. Incorporated just after 1900, the city grew with the expansion of the railroad, becoming a regional hub for cattle ranchers during the first half of the 20th century.

Reuters/Akhtar Soomro

Garfield County, which encompasses Rifle, also has a long history of energy production, and has experienced booms and busts before. Most recently, technological advancements allowed companies in the early 2000s to tap the region’s vast reserves of natural gas trapped in previously unprofitable “tight sands,” rock formations with low permeability.

In the year 2000, roughly 150 wells were completed each year in Garfield County. In 2005, that number grew to 800. By 2008, more than 2,000 wells were completed and Rifle was bursting at the seams. Thousands of workers were moving to the region to participate in the new industry, and studies commissioned by the county projected population growth to continue rapidly for years to come.

Looking to the future, Rifle borrowed more than US$40 million to expand and upgrade its water and wastewater infrastructure. The city was growing: new homes, restaurants and shopping centers were concrete signs of Rifle’s economic vitality.

Then came the financial crisis, housing bust and recession of 2008-2009. Well completions dropped by more than half. As the national economy recovered and commodity prices rebounded, oil and gas companies shifted their focus to extracting natural gas from shale rock deposits, known as shale plays, in Pennsylvania and elsewhere, further decreasing activity in Rifle. In 2015, just 71 wells were completed in Garfield County.

In the aftermath of the bust, the millions of dollars of investment in Rifle’s infrastructure, which seemed a wise investment a decade earlier, has become a burden. With population well below levels projected during the boom, remaining residents have shouldered the costs. Wastewater rates have more than doubled, water rates have risen by roughly 50 percent and voters approved a new sales tax of 0.75 percent to finance the debt incurred for these new systems.

San Juan Basin

About 250 miles south of Rifle, through dusty mesas, lush national forests and windy mountain roads, sits Farmington, New Mexico. Farmington has the feeling of high desert, with snowy peaks in the distance and scrubby brush adorning the suburban roadways. The largest city in the “Four Corners” region, Farmington is the hub for oil and gas companies operating in the rich coalbed methane fields that produce natural gas from coal seams.

Like Rifle, Farmington experienced a boom in drilling activity in the early and middle decade of the 2000s. Long a hub of industry activity, the number of new wells entering production in San Juan County, of which Farmington is the seat, nearly doubled, from 435 in 2000 to 799 in 2006. But like the area around Rifle, industry activity rapidly declined in the following years, falling to just 60 new wells in 2015.

Reuters/Akhtar Soomro

However, Farmington’s downturn has been far less severe, and the city did not need to dramatically expand its services to accommodate the boom. Because it is the region’s largest city, Farmington has become a commercial hub for the surrounding Four Corners area, attracting shoppers from nearby parts of Arizona, Colorado, New Mexico, Utah and the nearby Navajo Nation.

In addition, the region has seen large-scale drilling activity for a longer period of time than Rifle, and the industry has grown deeper roots. Thousands of workers in pickup trucks owned by oilfield service companies continue to traverse the region, checking on the status of old and new wells, making repairs and supporting the local economy.

On the whole, net economic benefits

Much like the different experiences of Rifle and Farmington, we found the effect of the oil and gas boom varied across the country, depending on the nature of a community’s location, policy structure and economy.

Overall, though, based on our interviews and analysis of financial data, it appears that a substantial majority of local governments across the United States have experienced net fiscal benefits from increased oil and gas production. They have seen growth in demand for public services, but increased revenue from a variety of sources has in most cases been more than enough to offset new costs.

Reuters/Akhtar Soomro

Local governments raise revenue from oil and gas activity in a variety of ways. In most states, county governments collect property taxes based on the value of the oil and gas produced (or in some cases the value of the underground reserves), leading to large upswings in revenue. For city governments, we found that sales taxes have been the largest growth source, spurred by increased populations and economic activity associated with the industry.

In addition, many state governments allocate a substantial share of oil and gas revenues to the local level. These revenues come from state severance taxes paid by oil and gas producers, along with royalties and other sources derived from production on state and federal lands. Figure 2 shows how four key revenue sources flow to local governments in the 16 states we examined.

Reuters/Akhtar Soomro

Some highly rural regions have faced challenges

Not all local governments, however, have seen net fiscal benefits from oil and gas production. Some regions, particularly rural areas like Rifle experiencing rapid industry growth, have struggled to provide services for a booming population. The leading challenges for these local governments have been maintaining roads impacted by the large volume of heavy vehicle traffic, expanding water and wastewater infrastructure, and retaining government staff attracted to high-paying opportunities in the oil and gas sector.

For some cities and counties, particularly those in North Dakota and Montana’s Bakken region, local populations grew by 50 percent or more over just a few years, creating challenges that any local government would struggle to manage.

With oil and natural gas prices falling by more than half since early 2014, many regions that experienced rapid growth driven by oil and gas activity face an uncertain future.

Population growth has slowed or reversed and revenues from industry have fallen. Some local governments invested tens or hundreds of millions of dollars to serve an increased population that may never arrive.

Boomtown lessons: big or small, plan carefully

Farmington’s population is roughly four times that of Rifle’s, and its economy is more diverse, able to attract economic activity from surrounding areas. For the small cities of Texas, North Dakota, Pennsylvania and other regions that have experienced rapid growth from the more recent boom, Rifle offers a cautionary note about the risks of rapid expansion driven by volatile oil and gas activity.

For larger cities with a more diverse economic base, the downturn in oil and gas activity will create economic challenges, but they are unlikely to be as dramatic as those experienced in regions that depend predominately on the oil and gas sector.

A larger lesson, one learned over decades by some oil- and gas-rich countries like Norway and Saudi Arabia, is that an economy tied to extractive industries is well-served by saving money during the good times, and preparing for the inevitable hard times that come with the next downturn.

Some U.S. states including Alaska, New Mexico, North Dakota and Wyoming have applied these lessons by establishing large savings funds that can support government services when belts tighten. But even Alaska, which boasts the largest state savings fund, is struggling to manage its budget during the current downturn.

In the long run, all communities heavily dependent on oil- and gas-related revenues will face the need to diversify or shrink, a major challenge when regional economies have come to thrive on the extraction of finite resources.

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