Dakota Beacon

PART I – NORTH DAKOTA “OIL PATCH” PROJECTION

Oil “Floor Prices” in Recent U.S. Recessions:

• 1990-91 Recession - Dependence on imported oil was at 50% and price subsequently fell to a floor level of $9 per barrel.

• 2001 Recession - Dependence on imported oil was at 65% and price subsequently fell to a floor level of $17 per barrel.

• 2008-10 Great Recession - Dependence on imported oil was at about 65%, and price subsequently fell to a floor level of $35 per barrel.

If the approximately 10-year frequency of the last three recessions is projected forward, a future recession would occur around year 2020 with a world oil price “floor level” in the range of $47 to $63 per barrel. Oil distribution infrastructure (i.e. Keystone Pipeline, etc.) to be constructed in the next eight years should insure that, by year 2020 North Dakota oil prices are very likely to be “on par” with world oil prices. World oil demand is projected to increase at an annually compounded rate of 2.0% to 2.2% per year until 2030-2040. This prognosis bodes well for North Dakota, barring extremely unlikely increased federal intervention (such as a “fracking” moratorium) in development of N.D. crude oil. Now let’s take a look at three future world oil price assumptions. Low Oil Price, Reference Oil Price, and High Oil Price:

Low Oil Price Assumption

In the Low Oil Price case, the net import share remains flat in the near term but rises to 51 percent in 2035 (Figure 114), as domestic demand increases and imports become cheaper than crude oil produced domestically.

Reference Oil Price Assumption

The net import share of U.S. petroleum and other liquids consumption, which fell from 60 percent in 2005 to 50 percent in 2010, continues to decline in the Reference case, with the net import share falling to 36 percent in 2035 (Figure 114).

U.S. consumption of petroleum and other liquids (in the Reference case) increases from 19.2 million barrels per day in 2010 to 19.9 million barrels per day in 2035, a 0.7 million barrels per day (3.65%) increase in consumption over 25 years, representing a very stable petroleum industry.

As a result of increased domestic production and slow growth in consumption (in the Reference case), the United States becomes a net exporter of petroleum products, with net exports almost doubling (increasing 89%) from 0.18 million barrels per day in 2011 to 0.34 million barrels per day in 2035.

As world oil prices increase in the Reference case, U.S. production of “tight oil” (liquid oil embedded in low-permeable sandstone, carbonate, and shale rock) and production using carbon dioxide-enhanced oil recovery (CO₂-EOR) techniques add to the projected increase in domestic crude oil production from 2010 to 2035. “Tight oil” production (from the Bakken formation in North Dakota and the Eagle Ford formation in south Texas) surpasses 1.3 million barrels per day in 2027 and then declines to about 1.2 million barrels per day in 2035 as "sweet spots" are depleted.

High Oil Price Assumption

In the High Oil Price case, the net import share falls even lower than in the Low Oil Price case to 22-percent in 2035. In the High Oil Price case, net exports of petroleum products increase to 0.9 million barrels per day in 2035 (only a little over one-fourth the increase in net exports of the Reference case).

Summary:

The Low Oil Price assumption is likely to prevail only if major currencies collapse, which would likely include the collapse of the Euro, the Dollar’s end as a world’s currency, and the corresponding rise in the value of the currency of those countries with responsible fiscal balance sheets. So North Dakotans have a HUGE vested interest in a permanent solution to our federal deficit spending addiction.

The Reference Oil Price assumption predicts growth of Bakken production through year 2027 and a slow retreat thereafter. U.S. domestic production is projected to increase from about 6 million barrels per day this year to 6.7 million barrels per day in year 2020 and then slowly retreat to 6.48 million barrels per day by 2027. July 2012 North Dakota oil production of 674,000 barrels per day represents about 11.25% of total domestic production.

This author’s prediction, as influenced by the Reference case, is that North Dakota production can be expected to reach a minimum of 755,000 barrels per day in year 2020, with a further increase to 850,000 barrels per day by year 2027 and a slight slowdown to 785,000 barrels per day by year 2035. This suggests that a period of at least two decades of prosperity is ahead IF our country solves its federal spending addiction

Part II – North Dakota K-12 Revenue Sources

The pie charts on the following page reveal the sources of North Dakota K-12 Education System Revenue for the 2008-2009 school year and for the 2010-2011 school year, the year that North Dakota’s legislature provided “property tax relief” to local school districts. It would appear from the two pie charts that eliminating federal revenue would require elimination of around 13% of expenses. But that is not necessarily the whole story…

Prior to the 2013 legislative session, the North Dakota Policy Council will release a study that reveals estimated costs to the state of North Dakota associated with federal mandates in several areas. In the area of K-12 education, the study will reveal that receiving federal funds necessitates significant state spending to implement the mandates that come with federal funding. So let’s take a look at the purely budgetary affect of federal funding of K-12 education.

After we allow ourselves to arrive at the realization that federal funding of K-12 education is unproductive economically, we can objectively discuss which mandates that come with such funding are worth implementing in the case that federal funds are rejected by the state of North Dakota. This is a discussion for those intimately familiar with the internal workings of K-12 education so will not be discussed further in this paper.

Part III – North Dakota K-12 Demographics

Demographics of the North Dakota Department of Public Instruction (DPI)

Over 65 years old                             2%

60-64 years old                  12%

55-59 years old                  20%

50-55 years old                  19%

Total                                                      52%

Of the 86 employees identified in the latest information available, over half will retire in the next 15 years. If these employees were not replaced, the number of employees in DPI would fall to about 55 employees in ten years and 40 employees in fifteen years (ignoring resignations).

Historic K-12 Enrollment

K-12 enrollment in North Dakota in the mid 1960’s was near 150,000 (see graph on next page). So we have over a third less K-12 students than we did in the mid 1960s. Most importantly, an incentive program to reduce the number of K-12 administrators by 39% over the next decade does not appear to be such a radical idea.

Non-Instructional Portion of Total Salary Expenditures for largest North Dakota School Districts:

City                             1994                            2006                Percent Change

Beulah                                  42.1%                                    38.5%                                    -8.55%

Bismarck                              30.7%                                    32.3%                                    +5.21%

Devils Lake                          39.8%                                    36.5%                                    -8.29%

Dickinson                             29.2%                                    32.7%                                    +12.0%

Fargo                                     35.4%                                    34.9%                                    -1.41%

Grand Forks                       37.0%                                    32.4%                                    -12.4%

Jamestown                         27.7%                                    30.0%                                    +8.30%

Mandan                               31.1%                                    45.6%                                    +46.6%

Minot                                    32.8%                                    32.1%                                    -2.13%

Valley City                           30.5%                                    30.7%                                    +0.66%

West Fargo                         32.8%                                    35.8%                                    +9.15%

Williston                               26.7%                                    36.5%                                    +36.7%

Average                      33.0%                         34.8%                         +7.15%

The non-instructional portion of K-12 salary expenditures has risen about 0.6% per year while the number of students is falling at an average of 0.8% per year. What’s wrong with this picture?

Part V – North Dakota K-12 Innovation and Reform

But “No Child Left Behind” and decades of interference from the Department of Education as enforced by the North Dakota Department of Public Instruction has demanded increases in both plant and administrative staff!

No problem, let’s just decline the 13% of K-12 funding that originates in Washington, DC!

And since were thinking innovatively, let’s take the last legislative session’s action and take it to its logical conclusion… let’s fund K-12 Education entirely with state funds!

And let’s mandate a hiring freeze on DPI staff, promoting from within, to reduce from 86 employees to 55 employees over the next five bienniums (ten years) with the ultimate goal of a minimal “support only” staff of a maximum 40 employees in DPI in 15 years.

Let’s also mandate reductions over time of statewide K-12 administrative staff with a similar hiring freeze and “promotion from within the statewide system” to replace administrative retirees. Let’s force K-12 administration to perform all of the work they are already paid to do! 40% reduction in statewide administrative positions (554 to 338) in the next five bienniums (ten years) is within reach and reduction of 50% in fifteen years should be possible with innovations learned through 100% individual autonomy of school districts and the lessons learned from the most successful in reducing administrative staff while raising student outcomes!

When we take these bold initiatives, the following advantages can be realized:

• Constitutionally mandated 100% control of K-12 school district activities by local school boards with no interference by state or federal bureaucrats, with one exception;

• State autonomy in equitably determining each K-12 school district’s annual budget amount available, fairly ignoring its urban or rural location… the one thing that local school boards cannot seem to get a handle on, setting the budget limitation.

• Permanently takes K-12 Schools out of the “Local Property Tax” equation, cutting property taxes by an average of 54%.

• Results can be monitored to determine if state funding of a local entity (with total local control of how the money is spent) can work well.

• K-12 administrators that remain will find themselves in a position to “actually earn their salary” by creating K-12 education in their particular district that “improves outcomes over time”. Those that are most successful in this respect will become the leaders of K-12 that will bring North Dakota to a world class level in both economy and outcomes!