Hibbing grad warns of economic crisis below ground

An oil well near Williams, North Dakota. (PHOTO: Geof Wilson, Flickr CC)

During the oil boom ten years ago I knew a number of guys who would pack a bag and drive from Northern Minnesota to western North Dakota to work weeks at a time in the Bakken oil fields. Classmates. Friends of friends. Parents from my kids’ school.

During the Great Recession of 2008 this was a quick way to a good paying job, and often the best option for laid off workers on the Iron Range. As the nation’s unemployment rate grew, North Dakota’s nearly evaporated.

These journeymen bought their food here. Groceries near the oil fields cost three times as much due to the high demand. Most slept in trailers near the job site because rent in Williston, North Dakota, cost as much as rent in Manhattan. Young guys got rich every month, blew their life savings in a week, and got rich again. Others sent the money home, hoping for better times ahead. It was a honest-to-God BOOM, like you read about in the history books.

Every 10 days or so, the family men would drive home tired. Hundreds of miles on the road for a one-week chance to patch the family back together.

Oil seemed to defy all economic gravity. Until then, talk of foreign oil and dwindling oil supplies tamped down any optimism about the gas-guzzling world we created for ourselves. But then fracking for natural gas and petroleum changed everything.

The oil boom subsided in 2012, mostly due to falling prices. Nevertheless, we still find today’s United States a major producer of oil again. American oil and natural gas flow through the marketplace, and even in ships to foreign countries.

But there’s a problem. A writer who knows about bursting bubbles and corporate energy schemes sounds a new warning.

And she’s from Hibbing.

Bethany McLean made a name in business reporting when she was one of very first people to report on energy industry speculation at Enron. That’s the giant corporation whose downfall sparked an economic crisis 16 years ago.

Bethany McLean in 2012 (PHOTO: Third Way Think Tank, Flickr CC)

I interviewed McLean back then for a Aug. 23, 2002 Hibbing Daily Tribune story about her success. She grew up on the Iron Range, a 1988 graduate of Hibbing High School

Today, McLean reports on a looming economic crisis in the U.S. oil industry. Despite the massive exploration and development in oil, companies aren’t demonstrating corresponding profit. A combination of low interest rates and speculative investment has conveyed the appearance of success, when the truth is much cloudier.

McLean details her theories in her new book “Saudi America: The Truth About Fracking and How It’s Changing the World.” She penned a Sept. 1 essay for the New York Times using material from that book.

Writes McLean:

For a long time, the public markets have been valuing fracking companies not based on a multiple of profits, the standard way of valuing a company, but rather according to a multiple of the acreage a company owns. As long as companies are able to sell stock to the public or sell themselves to companies that are already public, everyone in the chain, from the private equity funders to the executives, can continue making money.

It’s all a bit reminiscent of the dot-com bubble of the late 1990s, when internet companies were valued on the number of eyeballs they attracted, not on the profits they were likely to make. As long as investors were willing to believe that profits were coming, it all worked — until it didn’t.

These days, the rhetoric of “energy independence,” meaning an America that no longer depends on anyone else for its oil, not even Saudi Arabia or OPEC, is in perfect harmony with “Make America Great Again.” But rhetoric doesn’t produce profits, and most things that are economically unsustainable, from money-losing dot-coms to subprime mortgages, eventually come to a bitter end.

North Dakota wasn’t the only place affected by the fracking boom. We see similar tales in parts of Texas, Oklahoma, Pennsylvania and Alaska, too.

A friend of mine in Alaska told me once that they run the price of oil on the front page of every newspaper, alongside the price it needs to be for Alaska to be solvent. There’s no income tax in Alaska. They rather depend on the oil money, which comes and goes.

Here I found an interesting piece from columnist Charles Wohlforth in the Anchorage Daily News. He cites Alexander James, an economist at the University of Alaska-Anchorage. James argues that the oil boom in Alaska created more economic damage than if it hadn’t happened at all.

Sure, oil brings in revenue, but no means to handle the loss when that revenue stops. Growth is too fast and unstable to create sustainable prosperity. In the end, Wohlforth writes, all that money ends up wasted or in the pockets of people far away.

Citing James’ research, Wohlforth writes:

Some places escape the resource curse using other advantages. If an economy grows, making use of new people, incomes can grow along with population. California had a gold rush and ended up with San Francisco, thanks to its climate and many other economic assets.

But that didn’t happen [in Alaska]. James found that incomes were less than they would have been, or, by one measure, close to unchanged.

“The problem with Alaska is that we’re isolated,” James said. “We don’t have a manufacturing sector that you could feed with that oil shock. And you can’t buy that kind of industry. There’s good reasons why we don’t have those industries.”

Investments in human capital and quality of life could pay off, he said, such as improving schools and reducing crime. A well-educated population can be an economic asset as real as San Francisco’s good weather and prime location.

It’s a cautionary tale, one that should serve a lesson to all, especially here in Northern Minnesota. Breaking the boom and bust mindset is good for our economic health.

And we should all prepare for times when oil and credit aren’t so easy to come by.


  1. “And we should all prepare for times when oil and credit aren’t so easy to come by.”

    Great article, great topic. Thanks Aaron. An oil free economy is the only way to be truly energy independent.

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