When Gov. Matt Mead started an initiative to expand the state’s economy into the rest of the 21st century, he asked his staffers to look to the past.
He wanted them to mine Wyoming’s archives back to the 1960s for task force reports, committee agendas and idea-generating memos that would reveal what earlier generations of lawmakers had done or planned to do about the state’s economic challenges.
One refrain rose from the stack like disturbed dust: the need for a diverse economy.
It was the advice of the ’60s, the ’70s and the ’80s. And it was the same suggestion laid on the desk of Mead’s grandfather, Clifford Hansen, the state’s governor from 1963 to 1967.
“It’s not a new concept we are dealing with, but because of circumstances or the way we approached it, we haven’t tackled it in an earnest way over a long period of time,” Mead said.
The governor’s recent foray into decades-old folders and long-filed accounts was instigated by a triple bust in Wyoming’s oil, gas and coal industries and a budget crisis.
The downturn in the state’s fossil fuel industries meant the near-evaporation of 70 percent of the state’s revenue stream. While minerals like trona and bentonite also contribute to the state economy, without oil, gas and coal, the money to pay public employees, build schools and fund research and development would be reduced to a trickle.
Companies may have found a new normal, with lower prices for oil and gas and a smaller workforce of coal miners, but the state continues to grapple with budget problems. With uncertainty in the electricity market and global demand for fossil fuels, Wyoming’s energy-dependent economy is in a precarious position.
“We’re down over a billion dollars in severance taxes and mineral royalties,” said Rep. Mike Madden, R-Buffalo. “If this is the new normal, we’ve got a new set of problems.”
An economy that depends so heavily on the energy industry and a tax code built around royalties is Wyoming’s Achilles heel, said the conservative lawmaker from oil- and gas-rich Johnson County.
Yet as the governor tries to learn from the past and lawmakers cut more from the state budget, it’s clear that the energy markets remain out of leaders’ control.
And the call to diversify in Wyoming has arrived front and center once again.
Looking back to look forward
The people of the Cowboy State have come to expect a boom and bust economy, but the first thing to understand about Wyoming’s economic history is that the story is not as simple as the phrase suggests.
Drawing on experience, many hope the state can weather the bust as it did in the ‘80s. But people forget that oil remained down for 20 years after its 1986 collapse, said Rob Godby, director of energy economics and public policy at the University of Wyoming. It wasn’t a boom followed by a bust; it was a boom followed by a two-decade trough.
And while the initial oil crunch eviscerated local economies in oil towns like Casper, the state was propped up to some degree by the rise of coal, Godby said.
Unlike today, Wyoming was a one-trick pony in the early ‘80s. Agriculture, ranching, coal mining and aviation have all benefited the economy at one time or another, but it was oil that drove state revenue for decades leading up to the bust.
Things would have been even worse if not for the unexpected growth of the Powder River Basin coal sector, Godby said.
“That slow, steady increase in the 1980s kind of saved our bacon,” he said. “Just as the collapse in oil really hit the state, we became the No. 1 producer of coal in the country. It was almost exactly the same time.”
Coal taxes flowed quietly but quickly into the existing but greatly diminished oil revenue stream.
During the oil downturn, a handful of oil and gas pioneers found out just how much methane was trapped in coal beds in the Powder River Basin. The coal bed methane boom hit in the late ‘90s. New technologies in drilling, including hydraulic fracturing and horizontal drilling, blew up the gas market.
Small producers like Mick McMcurry discovered the wealth of the gas patch around Pinedale.
“Nobody was talking about natural gas until the ‘90s,” Godby said. “People like McMurry and his partners, they were seriously thinking natural gas. But the reason they were so successful is they were the contrarians. They worked at it when nobody else was.”
In a matter of years, gas, once a forlorn byproduct of oil, poured wealth into the state coffers. And finally, instability in the Middle East after Sept. 11 and stricter production control by the members of OPEC gave oil the kick it needed to escape its slump. As everyone focused on the fireworks of natural gas, oil began a steady increase.
Wyoming’s energy portfolio went from a one-horse show to a three-pony act, but the state’s economic approach has remained static.
“Where we run into problems is our entire economic revenue structure, as far as the state is concerned, has not diversified as well,” Godby said. “It’s built on the same models we used for oil. We’ve adapted those to coal and natural gas and export our taxes to other people.”
The time is now
For producers, there is hope and confidence that the state’s energy sector will thrive again. But the industry has a different approach to a bust than state government.
“If this is what a recession looks like nowadays, it’s a different-looking beast than what I saw in the mid-’80s,” said Cary Brus, senior vice president for Nerd Gas, a McMurry company. “That was devastating. This is challenging, but it’s much smoother.”
Companies can run efficiently, and they’ve learned to adapt to a lower price environment, he said.
“Twenty-four banks failed in the ‘80s,” Brus said. “Zero banks failed this time. I think we are diversified enough that we are going to weather this storm, and I am hopeful that we will weather this going forward.”
But that doesn’t necessarily translate to the kind of revenue the state had come to expect, he acknowledged.
“I think you have to have all of the above, and that doesn’t just apply to the basket of energy fuels,” he said. “It applies to other industries as well.”
This downturn will also have some extended consequences in Wyoming, Brus said.
In the past when there was a market decline, industry would scale back and plan ahead. But industry has witnessed a reduction in leases on federal land under the Obama administration, Brus said. The impact of that will be an extended downturn, he added.
“It’s the point I’m trying to make to anybody who will listen to me: When the price does rebound, Wyoming will not have the projects teed up for delivery as we’ve had in past decades,” he said. “You’ve always had a way to replace revenue before with new projects. Now you are just going to ride the decline curve. That’s the game-changer. That’s what would keep me awake at night at the state.”
As Wyoming faces a revenue crisis with no silver lining, the prospects for the commodities that right now carry the economy is uncertain.
“It is very possible that oil prices could come raging back. All it takes is a war in the Middle East or even the threat of some kind of major security change in the Middle East,” said Godby, the UW economist.
A simple increase of tension between Saudi Arabia and Iran or changes with Russia’s involvement in Syria could set that off.
“Bottom line is it’s a tinder-dry forest. It might not catch on fire, but things could really escalate there really quickly,” he said.
Another uncertainty for the future of oil lies in the action of OPEC, the cartel of oil-exporting countries that has phases of strict production control and periods of backbiting competition. Right now, the cartel has lost some of its discipline, Godby said. Should that change, the cartel will keep prices steady by controlling the supply and demand imbalances.
The United States has complicated the international market in recent years. Now the third-largest oil producer in the world, the U.S. has emerged as a swing producer, upsetting cartel control and contributing to oil price depression, experts say.
On the other hand is a worldwide acknowledgement of climate change pressures, he said. Though some in the U.S. continue to question climate science, and many leaders in Wyoming are skeptical of how emissions affect the environment, the trend is toward reducing emissions.
“The world appears to recognize that they need to do someone about climate change. The downside is price,” Godby said. “[Climate change] is going to reduce the amount of oil used in the world and that again is going to keep prices lower.”
Meanwhile, coal and natural gas are also both facing pressure from climate change policies, and likely will in the future, he added.
Whose burden now?
Even as researchers look into myriad possibilities for other uses of coal, oil and natural gas, Wyoming is still relying on traditional uses for fossil fuels to raise revenue.
The question is whether oil, gas and coal can continue to be titans, bearing the burden of the state’s economy.
Most agree that they cannot. Whatever the future of the commodities, their health may not be robust for years to come.
The governor said he agrees Wyoming needs to stop assuming energy alone will carry the tax burden.
“They have largely paid our bills, and I think we need to address that,” he said.
The reliance on oil, gas and coal revenue decreases the need to be thrifty, the sense of responsibility with public money, he said.
“It’s a broad policy question because if we say ‘yeah, let’s go ahead and build this brand-new school and there is no effect on us as individual citizens,’ I don’t know that we are being a good of stewards of the money as we should be,” the governor said.
What Mead gleaned from state history is that for one reason or another, the push to diversify has fallen short each time. The ENDOW initiative is a 20-year plan, because Wyoming needs to think long-term, he said.
“There is strong consensus on this is the time; we’ve got to do it,” Mead said.
Yet without a different tax structure, all the tech companies and manufacturing companies in the West could move to Wyoming to develop coal for new uses, and all the young people of Denver could come to run them, and the coffers would still be dry.
That’s if the state can even draw people and business to Wyoming.
“Any attempt to get new people to the state, you have to show them the sorts of amenities they see elsewhere,” Godby said. “A strong public education system, a strong set of social services, good infrastructure and all of that is going to require a stable revenue source. Taxing commodities, we’ve learned time and time again, is not a stable revenue source.”