Towns That Could Go Bankrupt With a $30/Barrel Oil Price

Oil prices have oscillated wildly since the 1970s. The oil embargo and supply shocks of that decade gave way to a price collapse that persisted through the 1980s and 1990s. Exploding demand in emerging economies such as China, India and Brazil inflated prices during the 2000s. In 2008, the price per barrel reached an all-time high of $147 before collapsing with the onset of a brutal global recession. Since 2010, oil prices have swung between $40 and $120 per barrel. Two countervailing forces, concerns about dwindling supplies and reduced demand amidst a sluggish global economy have kept prices from sustaining momentum in either direction.

For the average consumer, the only indication of what is happening in the oil markets is the price at the pump. When pump prices creep up, it is a safe bet the price of a barrel of oil is rising in tandem. It is an obvious logical jump, then, to say most consumers cheer at cheap oil. Low oil prices mean low pump prices, which clears room in the monthly budget for other expenses and allow for saving and investing.

Cheap oil, however, is not good news for everyone. In fact, entire cities exist where economic success is predicated on the oil markets, and not just in countries that are part of the Organization of Petroleum Exporting Countries (OPEC), but also in the United States. This is no new phenomenon, either. During the first oil spike in the 1970s, while the average consumer struggled, oil towns such as Midland, Texas boomed. People flocked to the area for its abundance of lucrative oilfield jobs; for a while, Midland boasted one of the highest median incomes of any city in the U.S. However, following the subsequent price collapse, Midland despaired. Empty streets and boarded-up houses gave the city a similar look to the Dust Bowl towns Midwesterners fled during the 1930s.

The development of the fracking technique, by which oil is extracted from subterranean rock formations with a high-pressure injection of water, has brought a new oil boom to several formerly sleepy U.S. towns. In certain oil boomtowns, growth has been so explosive that the most pressing problem is not lack of jobs but lack of housing for workers. Thanks to supply and demand dynamics, even unskilled laborers in the oilfields make as much as $75,000 per year, but they sleep in RV campsites and Walmart parking lots because there are no rental vacancies in town.

With oil prices steadily falling throughout 2015, the boom is beginning to abate in many oil towns. Though far from economic disaster at this point, certain cities could be in big trouble if oil prices drop to $30 per barrel or below.

Williston, North Dakota

If you were to pick one city that epitomizes the fracking boom, it would unquestionably be Williston. The city's population has grown by two-thirds between 2000 and 2015, with most of that growth coming after 2010 thanks to a frenetic in-migration of oilfield workers. The average home price in Williston, which was $56,000 in 2000, stands at $174,179 in 2015. During those same 15 years, the median household income jumped from $29,962 to $78,600.

Williston is the epicenter of the Bakken Shale formation, which stretches east to Montana, north to Saskatchewan, Canada and south to South Dakota. This sedimentary basin, which is rich in oil deposits, became a hotbed for drilling activity during the 2000s as fracking techniques were developed and refined.

Unfortunately, Williston is becoming a victim of its own success. When the fracking boom began, oil prices were through the roof, due to soaring demand in emerging economies combined with the sobering reality that fossil fuels are finite resources people cannot enjoy forever. Fracking activity in places such as Williston boosted global supply, putting downward pressure on prices. In fact, as of 2015, the U.S., not Saudi Arabia, stands as the world's largest oil producer.

There is a reason, however, why OPEC failed to panic when fracking in the U.S. sent oil prices reeling. At the organization's first meeting after the fracking supply glut became palpable, OPEC actually deferred from reducing its own supply output, effectively conceding oil's downward price trajectory. The reason: Extracting oil via fracking is much costlier than the methods used by OPEC. Therefore, higher oil prices are needed to support the practice and keep it profitable. At $30 per barrel, OPEC still has room for profit; fracking companies do not. OPEC is perfectly happy to let temporary low oil prices put fracking companies in the U.S. out of business and eliminate them as viable competitors. If this happens, Williston is likely to resemble Midland in the 1980s.

Watford City, North Dakota

Located in perhaps the richest part of the Bakken Shale formation, and about an hour from Williston, Watford City is like the little brother who grew up and established his own name. The town more than doubled its population between 2000 and 2015. Median income nearly tripled, while the average home price in town almost quadrupled. By any reasonable measure, the economy in Watford City is on fire. As of 2015, fast food restaurants in town advertise $16 per hour starting wages and still experience difficulty finding workers.

Falling oil prices have cast a similar pall on Watford City as on its big brother, Williston. Between 2014 and 2015, the number of active wells in the Bakken Shale formation has fallen by nearly 40%. While mild anxiety about what the city's future holds if prices continue to fall grips residents, most remain optimistic, pointing out that 2014 was a record year and, even amid the lower prices of 2015, the town's economy remains historically strong and unemployment sits below 2%.

Midland, Texas

The boom-and-bust West Texas oil town stands to lose again if prices fall to $30 per barrel or below. Situated in the middle of the Permian Basin, Midland has enjoyed renewed growth and prosperity during the years of soaring oil prices. As of 2015, the city once again appears on lists of the wealthiest metropolitan areas in the U.S.

However, as in Williston and Watford City, anxiety in Midland is building to a crescendo as oil prices decline. In fact, it is more salient in the Permian Basin than perhaps anywhere; residents who stuck around through the hardscrabble 1980s have vivid, not to mention unpleasant, memories of life in the midst of bargain-basement oil prices.

Also like in the Bakken Shale, the number of active wells in the Permian Basin has declined between 2014 and 2015, and oil and gas companies are not the only ones suffering. Because Midland is a much larger city than Williston or Watford City, it features many more entities that depend on the widespread economic growth wrought by the oil boom, from municipalities to bankers to retail operations.

If more wells close and the jobs they provide disappear, this could give rise to a domino effect that wreaks all-too-familiar economic havoc across the region.