You may have seen the recent study that showed that rents in the Bakken are higher than anywhere else in the country. It’s amazing to see what a one-bedroom apartment costs, with Williston and Dickinson way ahead of Boston, New York and Los Angeles.
What we’re going to consider today is what these ridiculous numbers would mean for Montanans living along the Beartooth Front. If drilling comes here and creates the kind of demand for housing that causes rents to spiral upward, who will be affected? For whom will it be a boom, and who will be busted? We’ll get to higher level economic theory in later posts, but today I’m offering just back of the envelope estimates about what the impact would be.
The inflationary spiral
Why are these rents so high? It’s the huge pressure on existing housing stock that goes with an oil boom. Williston had 10,700 people in the 2010 census. It’s population is estimated to be between 25,000 and 33,000 today, and should grow to 44,000 by 2017. It’s impossible to build enough housing to accommodate a growth rate of over 400% in seven years, so rents go up. Way up.
But rents don’t rise in isolation. To attract employees to work in the oilfields and drive the trucks, you have to pay salaries that allow them to afford those apartments. Employees in service jobs that support the oilfields — restaurant workers, retail clerks, gas station attendants — need to live there too, and so their wages will need to go up. To pay them higher wages, the prices of the food they serve and the clothing they sell needs to go up too.
Prices of government services will go up, and taxes with them. Because the state of Montana has a gas tax holiday in place, local governments don’t get the additional revenues they need from Helena to accommodate growth. You can expect local taxes will go up to pay for those services, as they have in Sidney.
All of this contributes to an inflationary spiral that causes prices to escalate and escalate. But unfortunately it isn’t a nice even tide that lifts all boats equally. There are winners and losers in the process.
Who are the winners and losers?
So let’s consider who wins and loses, who leaves and who stays. Assume that Energy Corporation of America (ECA) makes good on its promise to “bring the Bakken to the Beartooths” — that they drill 50 wells, that they’re successful in finding shale oil, and that others follow behind them.
For the purposes of this analysis I’m not going to make any assumptions about number of wells and number of jobs. Later on it will make sense to look at actual numbers for housing stock, own vs. rent, location of oil leases vs. housing, number of jobs created per well, and so on. For now let’s just assume that there is enough expansion to pressure the housing stock and create a significant inflationary spiral.
That won’t be hard. The volume of wells and the population influx will be nothing like the Bakken, but the housing stock in Carbon and Stillwater counties is tiny in comparison to Williston and Dickinson. In 2010 Red Lodge had 2,125 people and the entire population of Carbon and Stillwater counties was less than 20,000 people, spread out over about 4,000 square miles.
As inflation occurs, several factors determine who wins and who loses, who stays and who leaves. The most significant include:
- Are you a landowner or a renter?
- Do you have a unified estate or a split estate (land and mineral)?
- Can you work in an oil-related job, or do you work in another industry?
Looking at these and other factors, here is a rough cut at the scorecard:
Ranchers, farmers and homeowners with a significant portion of the mineral rights to their land: This group gets the lottery ticket to big financial returns. If there’s extractable oil on their land (and that’s a big if), they’ll likely become millionaires. But winning comes with a cost, to them and to those around them. It’s unlikely they’ll be able to continue running their existing businesses because their land will be torn up by makeshift roads, easements, pipelines, well pads, and storage units. They’ll endure constant noise, they risk water contamination, and the air on their land will be fouled by hydrogen sulfide and other chemicals. Their water supply may be compromised by the millions of gallons required for fracking. And all of these things will affect their neighbors as well, whether they have mineral rights or not.
Ranchers, farmers, homeowners with split estates. Landowners who do not own their mineral rights (I suspect this is the vast majority. I intend to look at this at some point in the future.) will have few of the benefits of the group above with all of the negatives. If there’s oil on their land, they’ll be compensated for access, but at a much lower level. They also have a poor negotiating position. Montana law requires them to provide access to mineral rights holders, and horizontal drilling technology might enable the oil companies to exploit the minerals beneath their land from a neighboring property if they refuse. So there may be some money coming in from a surface use agreement, but the noise, the shaking, the smell, the water usage and potential contamination, the unsightly structures, the truck traffic and the inconvenience will become a part of their lives. The access fees may allow them to stay and even potentially profit, but they won’t get rich and they’ll lose the things they love about where they live. In addition, property may be devalued by the damage done in drilling.
Both of the above groups assume that oil is found on the property. If it isn’t, the landowner has to deal with the causes of the inflationary spiral with none of the revenue benefits. This will make it hard for many, particularly ranchers and farmers, to survive. The price of cattle or wheat does not fluctuate with the local market, and so inflation will be especially burdensome to this group if there’s no oil on their property. The value of real estate will rise, and debt could be used to offset the rise in costs, but this is a slippery slope — oil booms end, but debt stays.
Second home, vacation homeowners: This group is likely to pretty much disappear. What attracts them to Carbon and Stillwater counties is the pristine beauty of the land — the mountains, the streams, the wildlife, the skiing. I can’t imagine very many will be interested in staying with the quiet replaced by drilling, flaring and constant truck runs, the air fouled by hydrogen sulfide, and the wildlife scared away by the periodic booms of low level earthquakes. They’ll realize the increase in value of their property and relocate to an area where the frackers can’t go, or they’ll hold and benefit from the high rents. But one thing is clear — nature tourism and heavy industry can’t co-exist. If drilling expansion comes in the Beartooth Front, the ski industry goes out the back.
Renters: There’s only one way for renters to stay. They need to get oilfield jobs or they won’t be able to afford the rent increases. These jobs will not be plentiful for locals because many require specialized skills, and the labor pool for them will be international. Renters who don’t qualify will have to leave.
Independent retailers: Very few will survive. The competition for workers will become intense and it will take deep pockets to ride the escalator up — in the Bakken, McDonalds is paying $15/hour and offering a signing bonus of $300 to recruit workers. What has happened in the Bakken is that chain stores and franchises have replaced independents. Good bye Candy Emporium, hello Dunkin’ Donuts.
Seniors on fixed incomes: They have to leave. With no way to increase pension or Social Security, they won’t be able to afford the increase in the cost of living. If they own their home, they may be able to stay long enough to realize some increased home equity. If they rent they’ll be forced out quickly.
Government employees: It will be very difficult for them to stay. Government will be on a fixed income, going to Helena hat in hand to beg for what little they can get to pay for the additional services they need to provide. Teachers and county and city employees will not get the benefit of the increased salaries that go to private sector employees. They’ll need to commute or be lucky enough to be among the lottery winners who can stay because they own mineral rights.
Non-oil industry employees: One of the reasons it’s so hard to find employees to work at places like McDonalds is that you can’t live in a $2400 apartment if you’re making $15 an hour. The stock of employees who work service jobs will fluctuate constantly.
So there you have it — very elementary analysis, and a very rough first cut. I’m willing to be wrong, so don’t hesitate to contact me and offer criticism. I’ll be working on this in more detail as time goes forward.
Guideline for action
As with most discussions on this topic, there a lot of “unknown unknowns” here. If these is going to happen, local government and individuals need to be in action.
- Local government needs to be developing detailed plans for these possibilities. If we’re going to let the drillers in, then we should be planning for housing, schools, healthcare and all the things that will make it possible for workers to come in and as many people as possible to stay. Holding events that where people are told how wonderful drilling will be without comprehensive planning is a dereliction of duty for public officials.
- Landowners should be determining NOW whether they hold mineral rights to their land or whether they have a split estate. You can get this information at the county courthouse in Columbus or Red Lodge. I’ll be doing a post in the near future that provides step-by-step instruction on how to do this.
- Landowners shouldn’t panic or rush into any agreements without talking to others.
- Landowners should be doing baseline testing on your water.
- Everyone should be looking at his personal situation to determine whether he’ll be able to stay if a drilling-driven inflationary spiral takes place.
More to come on this subject…