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Today’s new homes are 1,000 square feet larger than in 1973, and average living space per person has doubled
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The Census Bureau recently released its annual report on “Characteristics of New Housing” for 2014, which includes data on the average and median size of new homes and those data are displayed in the top chart above. Here are some details:
1. In 2014, the average size of new houses built increased to an all-time high of 2,690 square feet (see dark blue line in top chart), and the median size new home set a new record of 2,506 square feet (see light blue line in chart). Over the last 40 years, the average home has increased in size by more than 1,000 square feet, from an average size of 1,660 square feet in 1973 (earliest year available from Census) to 2,690 square feet last year. Likewise, the median-size home has increased in size by almost 1,000 square feet, from 1,525 square feet in 1973 to 2,506 last year. In percentage terms, the average home size has increased by 62% since 1973, while the median home size increased by 64%.
2. While the average size of a new US home has increased over the last 40 years, the average household size has been declining over that period, from 3.01 persons per household on average in 1973 to a new record low of 2.54 persons per household in the last two years (2013 and 2014), a reduction of almost one-half person per household over the last 40 years (see brown line in top chart).
With the average new house in the US getting larger in size at the same time that American households are getting smaller, the square footage of living space per person in a new home has increased from 507 to 987 square feet using the median size home, and from 551 to 1,059 square feet using the average size home. In percentage terms, that’s a 95% increase using the median home size and a 92% increase using the average home size. In either case, the average amount of living space per person in a new home has almost doubled in just the last 41 years – that’s pretty amazing.
3. What about the cost of new homes over the last 41 years? On a per square foot basis using median home prices and median square footage, the inflation-adjusted price of new homes (in 2014 dollars) has been relatively stable since 1973 in a range between about $104 and $130 per square foot (see bottom chart above). And the price of just under $113 per square foot for new homes sold in 2014 was almost 14% below the peak of $130.67 per square foot for a new home in 2005, and was also below the cost per square foot in most years during the 1970s and 1980s, and below the cost per square foot in every year from 2004 to 2008.
4. The National Association of Realtors’s monthly measure of housing affordability (based on the median price for existing-homes, median family income, and the current fixed rate for 30-year mortgages) displayed in the chart above also shows that purchasing a home today (new or existing) is more affordable today than the average affordability measure of 124 over the last 34 years. The current affordability index for April was 165, which means that a family earning the median annual income of $66,483 would have 165% of the qualifying income of $40,320 required to purchase the median-price home of $221,200 with a 20% down payment and a mortgage for the $176,960 balance, financed for 30-years at the 3.95% current mortgage rate. Housing affordability has averaged 124 over the last 41 years (median income was 124% of qualifying income), and was below 100 in the first part of the 1980s. Americans enjoy housing affordability today that is well above average for the post-1980 period, and twice as affordable as in the early 1980s.
Bottom Line: We hear all the time about stagnating household incomes, the decline of the middle class, rising income inequality, and lots of other narratives of gloom and doom for Americans. But when it comes to the new homes that Americans are buying and living in, we see a much brighter picture of life in the US. The new homes that today’s generation of homeowners are buying are larger by 1,000 square feet compared to the average new homes our parents or grandparents might have purchased in 1973, and have almost double the living space today adjusted for household size compared to 40 years ago.
And of course today’s new homes, compared to those built in the past, are much more energy-efficient; they come with better, bigger and more bathrooms, closets, and garages; they’re equipped with better and more home appliances; and they almost all include modern features like central air conditioning today that might have been expensive options in previous decades like the 1970s. Americans are paying about 62% more today for a median-priced new home on an inflation-adjusted basis compared to 1973, largely because the size of the median home has increased by more than 64%. So on an inflation-adjusted basis, we’re actually paying slightly less today for a new home on a per square-foot basis than in 1973. Overall, the increasing size, improving quality, and relative affordability of new (and existing) homes today means that living standards continue to gradually, but consistently, improve year after year for most Americans.
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It’s been a few years since I last featured the pair of charts above showing: a) the number of jobless claims vs. the size of the US labor force (top chart), and b) jobless claims as a share of the US labor force (bottom chart), both updated through May 2015 with the most recent data for May (BLS data here and here).
The top chart shows why unadjusted jobless claims are very misleading: the size of the US labor force has more than doubled over the last 42 years, from 76.6 million in 1967 to the current level of almost 157.5 million Americans. The bottom chart shows jobless claims adjusted for the size of the US labor force, which have been steadily declining since 2009. Jobless claims averaged 272,950 in May, which is 0.173% of the May labor force of 157,469,000, and the lowest level since the Department of Labor started reporting monthly jobless claims in 1967. Compared to the most recent peak of 0.424% in March of 2009 during the Great Recession, adjusted jobless claims have fallen consistently to the current historic low-level of 0.173%.
This measure of initial jobless claims, adjusted for the increasing size of the US labor force over time, shows that jobless claims peaked during this recession above the levels of the last two recessions (1990-1991 and 2001), but were never anywhere close to the levels of the previous three recessions in the mid-1970s and early 1980s, and about the same as the 1969-1970 recession. The sharp reduction in adjusted jobless claims from the March 2009 high of 0.424% follows the same pattern of sharp reductions at the end of each of the last six recessions.
Bottom Line: Jobless claims, when adjusted to account for the size of the US labor force, have now fallen to the lowest level in history. Conditions in today’s labor market are actually slightly better than the unadjusted claims would suggest, especially when compared to previous economic recoveries. It’s amazing that so much attention is paid every Thursday to an important economic variable (initial jobless claims) that really has no meaning unless it’s adjusted to account for the size of the US labor force.
For example, see news reports today from Bloomberg, Fox Business, Wall Street Journal, Reuters, and the Washington Post — as usual, they all report unadjusted numbers and none of them make any comparisons to the size of the labor force, nonfarm payrolls or the size of the US population. To understand how deficient the unadjusted jobless claims figures are, it would be like the Bureau of Labor Statistics reporting the raw, unadjusted number of unemployed workers every month, without ever calculating the unemployment rate (number of unemployment divided by the labor force)!
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1. Mike Munger has an excellent article in FEE titled “Sabotaging Uber: The Umpire Strikes Back,” about creative destruction, Marc Andreesen’s idea that “software is eating the world” (destroying traditional ways of doing business) and Uber, here’s a slice (emphasis mine):
Evolution works by killing. Sometimes the death is slow — starvation or exclusion. Sometimes it’s outright murder, bloody and face-to-face. But make no mistake: natural selection means that some things survive, and others die. The things that survive may not be “better” than the ones that die, but they are better suited to their environment.
And so it is in a market system. Joseph Schumpeter called it “creative destruction,” but we tend to understate the “destruction” part. Economic competition implies the replacement of inferior systems of production and distribution by more efficient mechanisms; new and better ideas work through killing off the old ways, the old firms, and the old jobs.
It’s brutal. Instead of “survival” in a biological sense, the competition is over providing goods and services at higher quality and lower cost. Consumers win in this system, but it is tough on employees and employers.
And about Uber, Mike says (emphasis mine):
The company claims that it is not a provider of taxi services, but rather a software platform that helps a willing buyer and a qualified, nearby seller to find each other.
And Uber is exactly right about that: Uber is not an employer of drivers, and it is not a seller of transport services. Uber is selling reductions in transactions costs: I want a ride, and you have a car and a few minutes. We could never find each other on our own, but with Uber we can make a convenient, mutually beneficial exchange in safety and with minimal fuss on clearing the payment.
2. In a related op-ed “No Permission Slips Needed: From tools to taxis, sharing economy platforms allow for a dynamic process of self- and peer-regulation,” Mercatus Center research fellow Michael Farren writes:
Communication innovations like the Internet, smartphones and the emergence of platform firms (like Craigslist, eBay, Airbnb and Uber) allow greater individual-to-individual communication than ever before. This expands each person’s social network and the corresponding informal economy, lowering the cost of access to goods and services – especially those that we only occasionally need – and enhancing our quality of life by freeing up money and resources to be spent on other things.
A great example of this is the humble stud finder. Most of the time stud finders simply occupy space and get in the way of finding your other tools, but when you want to hang your new flat screen TV they are absolutely indispensable. Before the advent of the sharing economy this meant that most households ended up with their own combination stud finder/dust collector. Now with smartphone apps like 1000 Tools and NeighborGoods, rather than paying $20 for something that you only use a couple times each year (at best), the option exists to borrow or rent it from a nearby neighbor for a couple dollars. Even better, you could rent out your own and turn your dust collector into a money-maker.
The sharing economy has the potential to create enormous economic gains while enhancing the quality of our everyday lives. The important thing is to allow innovators and entrepreneurs to find the new ways that this can be accomplished without shackling them to work according to the rules developed for a bygone era.
3. From the Washington Post Wonkblog article “Buying a car could soon be a thing of the past, and Ford is desperate to find what’s next“:
Ford last month sent letters to 14,000 of its American drivers with an unusual suggestion: For extra cash, they could rent their cars to fellow urbanites wanting a cheap ride. America’s second-biggest auto giant wouldn’t directly sell any additional cars or trucks off the arrangement; it wouldn’t even take a cut. But it would put Ford closer to the front of a movement in which cars are shared, ignored or Uber-ed — not bought.
The “peer-to-peer” rental experiment is only the latest weird move for America’s auto powerhouse, maker of the F-150 and Model T. Last month, Ford launched a pay-as-you-go network of shareable, on-demand cars in London, called GoDrive.
4. From the Time Magazine article “How Uber and Lyft Are Trying to Solve America’s Carpooling Problem“:
First, the bad news: carpooling has been on the decline in America for nearly four decades. That practice could be helping the environment and America’s commuters, who are needlessly stuck for hours each day on packed highways. Multiple people sharing a single ride to a common destination is a simple act that has the potential to reduce CO2 emissions, ease traffic, lessen fossil fuel dependency, reduce stress on commuters, and even drive down rents in dense cities. Yet the practice fell out of favor after reaching a peak in the 1970s.
Now, the good news: popular tech companies Lyft and Uber are leading a wave of new services that have the potential to revive shared rides. “What fascinates me about these things is: can they move us closer toward a vision of an integrated public transit system?” asks Susan Shaheen, co-director of the Transportation Sustainability Research Center at the University of California, Berkeley. “And can it move us closer to filling empty seats in vehicles?”
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Here’s the abstract of the research article “The Unintended Consequences of Changes in Beverage Options and the Removal of Bottled Water on a University Campus,” which was just published in the July 2015 issue of the American Journal of Public Health (emphasis added):
Objectives. We investigated how the removal of bottled water along with a minimum healthy beverage requirement affected the purchasing behavior, healthiness of beverage choices, and consumption of calories and added sugars of university campus consumers.
Methods. With shipment data as a proxy, we estimated bottled beverage consumption over 3 consecutive semesters: baseline (spring 2012), when a 30% healthy beverage ratio was enacted (fall 2012), and when bottled water was removed (spring 2013) at the University of Vermont. We assessed changes in number and type of beverages and per capita calories, total sugars, and added sugars shipped.
Results. Per capita shipments of bottles, calories, sugars, and added sugars increased significantly when bottled water was removed. Shipments of healthy beverages declined significantly, whereas shipments of less healthy beverages increased significantly. As bottled water sales dropped to zero, sales of sugar-free beverages and sugar-sweetened beverages increased.
Conclusions. The bottled water ban did not reduce the number of bottles entering the waste stream from the university campus, the ultimate goal of the ban. With the removal of bottled water, consumers increased their consumption of less healthy bottled beverages.
And here is part of the paper’s conclusion:
The number of bottles per capita shipped to the university campus did not change significantly between spring 2012 (baseline) and fall 2012, when the minimum healthy beverage requirement was put in place. However, between fall 2012 and spring 2013, when bottled water was banned, the per capita number of bottles shipped to campus increased significantly. Thus, the bottled water ban did not reduce the number of bottles entering the waste stream from the university campus, which was the ultimate goal of the ban. Furthermore, with the removal of bottled water, people in the university community increased their consumption of other, less healthy bottled beverages.
The significant decrease in the percentage of beverages shipped to campus that received a green (healthy) NEMS-V rating and the significant increase in beverages receiving a red (unhealthy) NEMS-V rating when bottled water was removed in spring 2013 as well as the increase in calories per bottle suggest that consumers not only continued to buy bottled beverages but also made less healthy beverage choices after the ban was in place.
The comparison of the percentage of bottles shipped by beverage category helps to explain the changes in NEMS-V grades. As the shipments of water decreased to zero, most of the beverage categories remained relatively constant as a percentage of total shipments. However, the percentage of sugar-free beverages and SSBs increased, closely matching the decrease in water. This, paired with the finding that overall shipments increased each semester, suggests that many consumers who previously drank bottled water replaced bottled water with sugar-free or sugar-sweetened bottled beverages.
Ideally, when bottled water was removed, those who previously purchased bottled water would have adjusted their behavior and started carrying reusable water bottles. The university made several efforts to encourage consumers to carry reusable beverage containers. Sixty-eight water fountains on campus were retrofitted with spouts to fill reusable bottles, educational campaigns were used to inform consumers about the changes in policy, and free reusable bottles and stickers promoting the use of reusable bottles were given out at campus events. Although these efforts may have influenced some consumers, the ban does not appear to have achieved its goal of decreasing the number of plastic bottles entering the waste stream from the university campus.
Because it appears that many bottled water consumers instead decided to purchase other bottled beverages, the best result, nutritionally, would have been for them to select calorie- and sugar-free options, such as seltzer, unsweetened tea, or diet soda. However, the data suggest that some consumers increased their consumption of calorically sweetened drinks, such as soda and sports drinks, which could add to their liquid calorie and added sugars consumption, thus increasing the risk of weight gain.
MP: Wow, nothing worked out as expected by the college administrators at the University of Vermont: a) the per capita number of bottles shipped to the University of Vermont increased significantly following the bottled water ban, and b) students, faculty and staff increased their consumption of less healthy bottled beverages following the bottled water ban. Another great example of the Law of Unintended Consequences. And the bottled water ban was not costless – the university paid to modify 68 drinking fountains, they paid for a publicity campaign, and they paid for lots of “free” reusable water bottles; and what they got was more plastic bottles on campus of less healthy beverages!
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A couple of interesting new items demonstrating some pretty whacky, topsy-turvy economics:
1. From a Bloomberg report: “Why the iPhone 6 Costs $47,678 in Venezuela“:
Apple Inc.’s iPhone 6 sells for about 300,000 bolivars ($47,678) at local e-commerce site Mercado Libre, about 41 times the country’s minimum monthly wage of 7,325 bolivars [or almost 3.5 years of full-time work].
2. From a Marketplace report “Greece’s car dealers prosper amid widespread hardship“:
For car dealer Andreas Basilopoulos, there have been some unexpected signs of life at his used luxury car showroom in Athens. “The last three years we were selling 10 to 15 cars a month. Now it’s double,” he says. Sales have picked up for cars like a 20-year-old Porsche 911 priced at $60,000 and a four-year-old BMW at $30,000.
Basilopoulos has not been the only beneficiary of a curious — even bizarre — twist in economic behavior. In a country threatened with financial collapse and penury, sales of new and used luxury cars have jumped by 20% since the spring.
“We’ve had a lot of customers who are afraid of losing money if Greece is forced out of the eurozone and the country converts overnight to the drachma,” Basilopoulos says. “So they’ve been taking money out of the bank and buying luxury cars with it. Just to protect their wealth.”
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If you’re looking for a place in America where the American dream is alive and well, where you’ll find evidence of the marvels of “Made in the USA” technologies, and where the spirit of American “petropreneurship” has transformed an industry and turned the USA into an energy superpower, you’ll find all of that in Williston, North Dakota – ground zero for the US energy revolution and for the American spirit.
A regular CD reader, who has spent time recently in the Williston area, offered these insightful comments by email that confirm my observation that Williston is “ground zero for the American spirit”:
After reading your latest entries about the Bakken oil fields, I wanted to share a thought.
I believe every person I met in Williston was there to earn a living. They were there for work. They didn’t migrate there looking for a handout. They wanted to find work, they learned there was work in Williston, so they went to Williston. From the tattooed convenience store clerk to the scruffy roughneck, they all shared that common trait. I love being around people who take responsibility for their own well-being, and the Bakken is full of people like that.
I didn’t object to the crazy rates for a Holiday Inn Express room (about $200-300 per night now), the long waits for a marginal meal at the over-capacity restaurants, or the annoying traffic on streets that were too small for the flow. All of that seemed insignificant. I was surrounded by hard-working, grab-your-bootstraps-and-pull people. I’ve never worked in a community quite like that, and I’ve worked in hundreds of communities across the U.S.
Thanks again for Carpe Diem.
2. And here’s some more really interesting information that I learned by email today from an oil industry insider with experience in the Bakken oil fields:
One more fact that I’ll remind you of, just to blow your mind a little bit more. Six or eight years ago we were estimating a recovery factor of just 3.5% in the Bakken shale reservoirs from our horizontal wells. With additional work, micro-seismic study, well production history, big data analytics, etc., we’re now estimating that we’re recovering 15-18% of the oil in place. We further estimate, with our current technology, that the technically recoverable oil in the Bakken is 65 to 90 billion barrels.
Let’s pick the midpoint at 78 billion barrels of recoverable oil and assume a recovery factor of 16.5%. That implies we have about 470 billion barrels in place, of which 78 billion barrels can be recovered. Now let’s assume that over the next decade that the drilling and extraction technologies continue to improve and we are able to harvest another 5% of the oil in place — again, we now know exactly where it is and we know the exact profile of the geology/geophysics of the shale rock. That’s another almost 24 billion barrels of crude oil (470 billion x .05), which would be equivalent to discovering another Prudhoe Bay size oil field in the Bakken area! All it takes is more experience and technology gain to get the oil we know is there.
Related: Mark Mills’s recent article “Shale 2.0: The Coming Big-Data Revolution in America’s Shale Oil Fields” — here’s a slice:
Shale’s spectacular rise is also generating massive quantities of data: the $600 billion in U.S. shale infrastructure investments and the nearly 2,000 million well-feet drilled have produced hundreds of petabytes of relevant data. This vast, diverse shale data domain—comparable in scale with the global digital health care data domain—remains largely untapped and is ripe to be mined by emerging big-data analytics.
Shale 2.0 will thus be data-driven. It will be centered in the United States. And it will be one in which entrepreneurs, especially those skilled in analytics, will create vast wealth and further disrupt oil geopolitics. The transition to Shale 2.0 will take the following steps:
1. Oil from Shale 1.0 will be sold from the oversupply currently filling up storage tanks.
2. More oil will be unleashed from the surplus of shale wells already drilled but not in production.
3. Companies will “high-grade” shale assets, replacing older techniques with the newest, most productive technologies in the richest parts of the fields.
4. And as the shale industry begins to embrace big-data analytics, Shale 2.0 begins.
MP: Based on the information I received today and shared above, I think Shale 2.0 has already begun! Peak what?
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Here’s Part II of the “Top 10 things I learned on my summer trip to the Bakken oil fields,” see Part I here. I concluded the first post by saying that one of the things that impressed me the most about visiting the Bakken oil fields is the amazing technical sophistication involved in drilling for shale resources in reservoirs miles below the Earth’s surface, and then drilling out laterally (horizontally) for several more miles to extract oil from saturated shale rock formations that have been there for millions of years but were previously inaccessible using traditional drilling and extraction technologies. So let me continue that topic in this post with further discussion of the “marvels of engineering” that have revolutionized America’s energy production.
6. Advanced Technologies. The combination of hydraulic fracturing and horizontal drilling are truly revolutionary drilling and extraction technologies, and when you visit a drilling site you start to realize how advanced those technologies really are and you develop an appreciation for the high-tech nature of drilling for shale oil and gas. Perhaps this is a little bit of an exaggeration, but imagine the computer technology involved in a NASA space mission (see photo above, or imagine that “Silicon Valley Meets the Bakken“) and that gives you an idea of the drilling and extraction technologies used in the Bakken oil fields.
Remember the mission of drilling for shale oil: You’re going to drill down vertically for about two miles below the earth’s surface in the shale resources of the Bakken or Three Fork formations, and then you’re going to start drilling laterally for up to three miles in a roughly horizontal direction, guided by sophisticated computer equipment that “geo-steers” the direction of the lateral drilling to stay in the optimal areas of the shale reservoir! Each drilling site has one or more professional, certified geologists, along with petroleum engineers, who help supervise the directional drilling, based on 3-D seismic imaging of the subterranean structure that helps identify and target the fluids-rich shale reservoirs.
In the same way that computer technologies have revolutionized industries like ride-sharing transportation, special effects in movies, surgery and medical procedures, motor vehicles, architecture and engineering, medical and diagnostic procedures, smartphones, computers and devices, advanced manufacturing, 3-D printing, etc., advanced computer technologies have revolutionized oil and gas extraction, which is one of 50 industries identified by the Brookings Institution that constitute America’s Advanced Industries Sector. As I mentioned in Part I of this series, the general public is probably unaware of the fact that the oil and gas business is a very, very high-tech industry that uses cutting-edge, advanced engineering, geological and drilling technologies that continually advance and improve. The technological innovation that unlocked the nation’s oceans of shale resources hasn’t stopped but instead has actually intensified in the Bakken, Permian Basin, Eagle Ford and Marcellus regions. New ideas, technologies and ways of cracking the shale code emerge daily, and the oil and gas industry is now entering a new wave of innovation and advances that is being called Shale 2.0.
In contrast to the advanced technologies involved in hydraulic fracturing and horizontal drilling, the technologies involved to produce renewable energies like wind and solar power are relatively low-tech and primitive – centuries-old technology in the case of windmills. For those of us who appreciate the advanced high-tech, cutting edge technologies of our smartphones, GPS systems, laptop computers and other devices, and understand how those technologies improve our lives, we should also appreciate the advanced technologies that extract oil and gas from shale rock formations miles underground, with an appreciation of how those “marvels of petroleum engineering” also improve our lives significantly.
7. One Example of Advanced Drilling Technologies – the New “Walkable Drilling Rigs.” One of the most impressive “marvels of engineering” that you’ll ever see are the 150 foot (about as high as a 15-story building), 500 ton (1 million pounds) “walkable” drilling rigs that are becoming a common sight throughout the Bakken (and other oil fields in Texas, Oklahoma, and Colorado). The photo above shows two drilling platforms at a Continental Resources drilling pad in the Bakken near Williston called the “Burr Pad.” The one in the foreground is a newer “walkable” rig (discussed below) and the one in the background is a traditional rig platform. Drilling technologies have advanced so significantly that the time to drill and frack a well has come down from an average of 32 days in 2008 to now only about half that time: 14-16 days from start to finish and in some cases even less, resulting in significant cost savings. These drilling platforms now cost as much as $20 million each, especially for the advanced rigs that can “walk” to a new drilling location on the same drilling pad, or even “walk” to another pad a mile away, which is one of the huge, recent breakthroughs in drilling technology. Here’s a description of that amazing “marvel of engineering” from the Energy Information Administration:
Moving a drilling rig between two well sites previously involved disassembling the rig and reassembling it at the new location (“rigging down” and “rigging up”) even if the new drilling location was only a few yards away. Today, a drilling pad may have five to ten wells, which are horizontally drilled in different directions, spaced fairly close together at the surface. Once one well is drilled, the fully constructed rig can be lifted and moved a few yards over to the next well location using hydraulic walking or skidding systems, as demonstrated in the time-lapse video below.
One of the industry’s more recent innovations, pad-to-pad moves, underscores the efficiency gains from rig mobility and pad drilling. During the drilling operation in the photo above, rig operator Nabors Industries transported a fully-assembled drilling rig about one mile between drill sites. The cost of rigging down and rigging back up can be high enough that producers may find it more efficient to build a road between two pads, transport the rig intact, and have it arrive ready to drill the next well.
The new walkable drilling rigs are really an amazing technology and you can see in the video below that the drilling platform has hydraulic equipment built into the rig that allows the entire 1 million pound, 150 foot high platform to be lifted up off the ground about 12 inches and it then moves itself three feet at a time to the new location. Walkable drilling rigs not only increase operational drilling efficiency and save money for oil and gas companies, they also significantly improve oil worker safety because the rig moving process is largely automated with fewer steps and less human interaction than the traditional process of “rigging down” and “rigging up” the older model rigs.
8. Economic Impact of a Shale Oil Well. Despite all of the news about a slowdown in drilling activity in the Bakken, the number of active producing oil wells in North Dakota increased to a record high of 12,124 in the month of April (most recent month) and more than 9,500 of those active wells are in the Bakken. What are the production statistics and what is the economic impact of a typical individual oil well in the Bakken? Here are some details via the North Dakota Department of Mineral Resources:
Average cost to drill, frack and complete a Bakken oil well: $9 million
Expected production life of a Bakken oil well: 45 years
Lifetime oil production per well: 615,000 barrels
Expected lifetime revenue generated per well: $46.125 million at $75 per barrel
Total operating expenses per well: $2.3 million
Royalty payments to mineral owners per well over 45 years: $7.3 million
Taxes Paid per well: $4.325 million total ($2.1 million gross production taxes, $1.8 million extraction tax and $425,000 in sales taxes)
Total employee salaries and wages per well: $2.125 million
Average Profits Generated per Bakken well: $20 million net of costs and taxes
Current average daily production per Bakken well: 130 barrels ($7,800 per day at $60 per barrel)
Cumulative Oil Production in the Bakken Since 1954: 1.365 billion barrels through April 2015
Time to Produce the First Half of That Production (682 million barrels): Almost 60 years
Time to Produce the Second Half of that Production (682 million barrels): Less than 2 Years
The overall positive economic effects of fracking Bakken shale oil on the Peace Garden State are truly remarkable. In a recent post on CD, I documented how North Dakota has gone from one of America’s poorest states a decade ago to the country’s second-most prosperous state last year, measured by per-capita GDP (see chart below).
9. Flights to the Bakken. There are so many people travelling to and from the Bakken oil fields that Delta Airlines now offers four daily nonstop flights between Minneapolis-St. Paul and Williston, ND in each direction. Likewise, United Airlines offers four daily nonstop flights between Williston and Denver in each direction, and one daily nonstop flight between Williston and Houston in each direction! It’s pretty amazing that a major carrier like Delta offers four nonstop flights to and from Williston, a small town in western North Dakota with a population of only about 21,000, when Delta only offers three daily nonstop flights each way from Minneapolis-St. Paul to a major metro area like Washington, DC (population of 6 million) and four nonstop flights from Minneapolis-St. Paul to Boston (population of 4.5 million)!
10. Bakken Mancamps. There’s somewhat of a misconception that the oil field workers in the Bakken “work hard during the day” and then “play hard on their time off,” with a lot of evening and weekend boozing, partying and general debauchery. That’s pretty far from the reality for most oil field workers and truck drivers in the Bakken, who are often working 12 hour days, 7 days a week, and who live in one of the area’s mancamps and who have very little time for partying, and hijinks. And contrary to the general perception some might have, the mancamps in the Williston are very clean, offer high-quality housing for oil workers, and have very strict rules – there are generally zero-tolerance policies for drugs, alcohol, firearms, pets, guests and cohabitation.
One of the biggest mancamp operators in the Bakken is Target Logistics, which has ten facilities in the Bakken area of North Dakota, as well as facilities in Texas in the Permian Basin and Eagle Ford oil fields, and some international locations in Canada and Mexico, with more than 4,000 total beds in those locations. According to the Target Logistics website, here are some of the features they offer at the Bakken-area mancamps:
Four-star food providing high nutrition and 4,000 calories per day, available 24/7.
Comfortable private rooms with individual temperature controls, flat-screen TV/DVD players, oversized towels and The Hibernator Sleep System with a pillow-top mattress, high thread count sheets and overstuffed pillows.
State-of-the-art recreation and fitness centers and visiting personal trainers.
An Internet café.
Convenience store with free DVD rentals for use in the rooms.
Conference rooms for group safety and organizational meetings.
Lodges are located close to worksites, helping to reduce drive time.
Optional bus transportation to the well site.
A positive all-inclusive environment designed to prepare workforces for peak performance the next day.
The all-inclusive room rate (including unlimited food) is listed at about $110 per night, although in many cases, the companies operating in the Bakken make arrangements directly with Target Logistics on behalf of their workforce, negotiate discounts, and provide housing as part of a worker’s total compensation package. And as I documented in Part I of this series, rents and home prices have come down significantly over the last year in the Bakken giving oil field workers a lot more choices these days at much more affordable prices.
For example, here’s a listing on Craigslist for 3 bedroom, 2 bath modular-type homes in Williston that rent for $2,300 per month (furnished for an additional $195 per month) and sell for only $59,900 – that seems pretty affordable for a Bakken oil worker or truck driver who is making $100,000 per year or more. The frequently reported narrative of high wages in the Bakken being more than offset by high, rising and unaffordable housing costs seems to be changing rapidly in the favor of workers and renters in the Bakken. The spike in Bakken housing costs several years ago was understandable given the huge increase in housing demand interacting with a limited supply of houses, apartments and mancamps in the short-run. But now that the construction and supply of new housing and apartment units have skyrocketed in recent years, the affordability of housing in Williston has improved dramatically.
Watch the video above to get an idea of the quality of life in a Bakken-area mancamp, and you might be surprised. From various media reports, most people have probably developed lots of inaccurate and distorted stereotypes about life in a Bakken mancamp, and think it’s a sub-standard housing option with a low quality of life, punctuated by a lack of rules that lead to wild parties and weekend debauchery. The reality of life in a Bakken mancamp is much different, with a very regimented, rules-based environment, but with lots of amenities and unlimited access to high-quality food 24 hours a day, and generally a very high quality of life for the oil field workers in the Bakken.
Conclusion: To end this two-part series of my trip to the Bakken oil fields in May to experience America’s shale revolution firsthand, let me end with a couple of related quotes. The first one is from Gregory Zuckerman’s book The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters:
A group of frackers, relying on markets cures rather than government direction, achieved dramatic advances by focusing on fossil fuels of all things. It’s a stark reminder that breakthroughs in the business world usually are achieved through incremental advances, often in the face of deep skepticism, rather than government-inspired eureka moments.
George Mitchell’s team spent 17 frustrating years trying to get meaningful amounts of gas from shale and Harold Hamm’s men failed to pump much oil out of the Bakken until 20007. Their achievements are a reminder of the role of perseverance and obstinance in history’s advances.
Foreign nations lack perhaps the key element behind the US energy revolution: an entrepreneurial culture and ample incentives for the years of trial and error necessary for shale breakthroughs. George Mitchell, Harold Hamm and other headstrong wildcatters persevered because they knew they could gain both fame and remarkable fortune finding economic ways to tap shale. Comparable prizes don’t always exist in other countries, where governments play a larger role in society.
For all of the criticism this country has fielded for supposedly losing its edge in innovation, surging American energy production is a reminder of the deep pools of ingenuity, risk taking, and entrepreneurship that remain in the country. While some argue that Western civilization has entered a period of decline [and stagnation], many smaller American towns [like Williston] are experiencing a rebirth, with some young people in the energy business enjoying six-figure salaries, suggesting an underlying resilience in a country still recovering from the deep economic downturn.
The successes of the architects of the shale era are attributable to creativity, bravado, and a strong desire to get really wealthy. It doesn’t get more American than that. The huge rewards promised in the market-driven American economy…. provide incentive for remarkable achievement.
And here’s Bret Stephens writing in the WSJ in January “The Marvel of American Resilience,” and quoting Gregory Zuckerman:
Imagine an economic historian in the year 2050 talking to her students about the most consequential innovations of the early 21st century—the Model Ts and Wright flyers and Penicillins of our time. What would make her list? Why, she also might ask her students, did the U.S. dominate its peers when it came to all the really big innovations?
Surely fracking—shorthand for the combination of horizontal drilling and hydraulic fracturing that is making the U.S. the world’s leading oil and gas producer—would be noted and would make a good case study. The revolution happened in the U.S. not because of any great advantage in geology—China, Argentina and Algeria each has larger recoverable shale gas reserves. It didn’t happen because America’s big energy companies are uniquely skilled or smart or deep-pocketed: Take a look at ExxonMobil ’s 2004 Annual Report and you’ll barely find a mention of “fracturing” or “horizontal” drilling.
Nor, finally, did it happen because enlightened mandarins in the federal bureaucracy and national labs were peering around the corners of the future. For the most part, they were obsessing about the possibilities of cellulosic ethanol and other technological nonstarters.
Instead, fracking happened in the U.S. because Americans, almost uniquely in the world, have property rights to the minerals under their yards. And because the federal government wasn’t really paying attention. And because federalism allows states to do their own thing. And because against-the-grain entrepreneurs like George Mitchell and Harold Hamm couldn’t be made to bow to the consensus of experts. And because our deep capital markets were willing to bet against those experts.
“When I talk to foreigners, they’re even more impressed than many Americans by this renaissance,” says my Journal colleague Gregory Zuckerman, author of “The Frackers.” “They understand that it only could have happened in America.”
MP: My trip to the Bakken confirmed Zuckerman’s and Stephens’s comments about the fracking revolution, and I was left with the impression that there’s probably no place in America right now that better represents the “deep pools of ingenuity, risk taking and ‘petropreneurship’” that Zuckerman describes and “the marvel of American resilience” that Stephens mentions, than Williston, ND in the heart of the Williston Basin. If you’re looking for a place in America where the American dream is alive and well, where you’ll find evidence of the marvels of “Made in the USA” technologies, and where the spirit of American “petropreneurship” has transformed an industry and turned the USA into an energy superpower, you’ll find all of that in Williston, North Dakota – ground zero for the US energy revolution and for the American spirit.
View related content: Carpe Diem
At the end of May, I visited Williston, North Dakota for several days to see and experience the prolific Bakken oil fields firsthand. As a guest of Continental Resources (“America’s Oil Champion”), I was able to visit a drilling pad and see two amazing, modern drilling rigs in operation on the first day, and then visit a drilling pad the next day right outside Williston where 12 shale oil wells had previously been drilled and fracked, and will now be pumping shale oil almost 24 hours per day possibly for the next 40 years. I’d like to thank Continental Vice-President of Investor Relations and Research Warren Henry for arranging my rig tour, and Continental’s field superintendent in the Bakken, Kevin Mishke, for being my “rig tour guide” for two days!
In a series of two blog posts, I’ll present my Top 10 list for the most interesting things I learned on my summer trip to the Bakken, here are the first five items in Part I, with the next five to follow later in Part II.
1. The Geology of the Bakken Formation. What is called the Bakken Formation (or the Bakken oil fields) actually contains three different layers of shale formations (or “members”) at different depths: the Upper Bakken, the Middle Bakken and the Lower Bakken (see top graphic above and the right side of the bottom graphic). Most of the shale oil and gas to date have been recovered from the Middle Bakken (at depths of between 4,500 feet below the surface on the eastern edge of the basin to 11,000 feet in the southwest corner of North Dakota), although the Upper Bakken and Lower Bakken are now being successfully targeted for shale oil resources.
Below the Bakken formation lies an entirely separate shale formation: the Three Forks Formation, which has four different layers at increasing depths (see upper graphic above and right side of bottom graphic). Shale resources (oil and gas) are being recovered from the Three Forks 1 layer, while the Three Forks 2/3/4 zones are largely exploratory at this point. Together, the Bakken and Three Forks formations are part of the greater Williston Basin area that covers western North Dakota and parts of Montana, South Dakota and Canada.
The bottom graphic above (left side) shows the geographical areas of the Williston Basin (orange dashed line), the slightly smaller Three Forks Formation (blue dashed line), and then the slightly smaller Bakken Formation (green dashed line). The right side of the graphic shows a geographical cutaway of the three Bakken layers and the four Three Forks layers. Notice that none of those layers of shale assets are parallel to the Earth’s surface, and I’ll discuss that in the next section.
The graphic above shows the cumulative shale oil production (through Q1 of 2015) from wells in the Bakken area of North Dakota and Montana. The larger the green circle the greater the cumulative oil production from a given Bakken shale oil well, from new wells that have produced fewer than 250,000 barrels (small green circles) to larger and older wells that have produced 1 million barrels (large green circle — not a lot of those yet, but a lot that have produced at the next level down – 500,000 to 1 million barrels). As you can see on the map, the “sweet spot” of the Bakken with the largest concentration of wells is in the south central portion of Mountrail County, about 40 miles east of Williston; although McKenzie county to the south is now the “sweet spot” of the Bakken and has been out-producing Mountrail County by more than 50% for the last six months.
2. Horizontal Drilling. What is called “horizontal drilling” is actually somewhat of a misnomer, since the lateral, or horizontal section of the targeted shale assets are never actually parallel to the earth’s surface (see graphic above and the second graphic from the top in Item #1 above). “Directional drilling” is probably a more accurate term for what actually happens – the horizontal drilling is guided through the shale formations by a geologist in real time with advanced computer techniques to stay in the optimal part of the shale reservoir, a technique called “geo-steering.” In some cases, the well is being drilled at 90.5 degrees (or more) and other times at 89.5 degrees (or less). It’s really a marvel of petroleum engineering that the drilling process can be guided by a geologist sitting in a trailer on the drilling pad using sophisticated computer equipment to guide the drill path to maximize the shale resources that will be extracted over the 45-year average period that the wells are producing shale oil.
3. Frac Sand. Sand is a very important part of the hydraulic fracturing process and there’s lots of frac sand all over the Bakken oil fields. The frac sand gets transported to Williston by rail from sand-rich areas of Wisconsin and Minnesota and then gets delivered to the drilling locations by truck. The sand used for fracking is different from traditional industrial sand that is used for cement and other applications, you can see the difference in the photo above. Frac sand has certain desirable characteristics that make it ideal for fracturing open pores in oil-saturated shale rock formations, and then keeping those pores open for 40 years or more: it has a very uniform grain size, nicely rounded grain shapes, a uniform composition, and is usually mined from high purity sandstone that is extremely tough, and allows it to resist compressive forces in the shale formations of up to several tons per square inch.
Here’s how frac sand is used as a “proppant,” meaning that it is used to “prop open” the fractures (pores) in shale oil and gas reservoirs.
Subsurface rock units such as organic shale formations are saturated with large amounts of oil and natural gas that will not flow freely to a well because the rock formation either lacks permeability (interconnected pore spaces) or the pore spaces in the rock are so small that these fluids cannot flow through them to a well. The hydraulic fracturing process solves this problem by generating fractures (or “pores”) in the rock by drilling a well into the rock, sealing the portion of the well in the petroleum-bearing zone, and pumping water under high pressure into that portion of the well. This water is treated with chemicals and thickeners such as guar gum to create a viscous gel that facilitates the water’s ability to carry grains of frac sand in suspension.
Large pumps at Earth’s surface increase the water pressure in the sealed portion of the well until it is high enough to exceed the breaking point of the surrounding shale rock formations. When their breaking point is reached they fracture suddenly and water rushes rapidly into the fractured pores, inflating them and extending them deeper into the rock. Billions of sand grains (a few thousand tons) are carried deep into the fractures by this sudden rush of water. When the pumps are turned off, the fractures (pores) deflate but do not close completely – because they are propped open by billions of grains of frac sand. This only occurs if enough sand grains to resist the force of the closing fractures have been delivered into the rock. The new fractures in the shale rock, propped open by the durable sand grains, form a network of pore spaces that allows petroleum fluids to flow out of the shale rock and into the well, and then up to the surface.
There are actually at least 8 different sizes and gradations of frac sand according to the American Petroleum Institute, although two of them are the most popular and used most frequently. However, depending on the specific characteristics of an individual shale formation, and even in different parts of the same shale formation, the size of the frac sand used will be varied to maximize the flow of petroleum fluids out of the shale rock. If the frac sand grains are too large, they might hold the fractured pores open but block the petroleum fluids from flowing out, in which case, they have to switch to a smaller size sand. It’s another example of the amazingly complex and advanced engineering that is at the core of today’s shale oil and gas industry.
4. Housing Costs. Market fundamentals for housing are coming back into balance in the Bakken area, as the growing supply of housing options seems to have finally caught up with the demand for housing, which has fallen recently as a result of the temporary slowdown in the oil business in response to falling oil prices. As the chart above shows, housing construction has exploded in the Williston area in recent years, measured by the number of building permits issued. In 1999, when Williston was just a sleepy town in western North Dakota, there were only two building permits issued during the entire year, both for single-family homes. Until 2007, there hadn’t been a building permit issued for an apartment building in Williston for decades. Once the Bakken oil boom took off about 7 years ago, demand for housing started to skyrocket and that sparked a construction boom that continues to today. Over the last four years (2011-2014), permits have been issued for a total of nearly 6,300 new housing units, 5,145 for new apartment units and 1,127 for new single-family homes. The building boom and significant increase in housing units has now started to moderate home prices and apartment rents in the Williston area.
For example, a recent headline in the Williston Herald announced that “Rents are beginning to plummet in Watford City,” which is 45 miles from Williston. The article says that “In Watford City and Williston, rents tumbled 20 percent since the beginning of the year,” and that supports something I heard from a frac sand truck driver I met in Williston. The Tennessee native told me that he shares a 3-bedroom apartment with two other oil field workers, and when their rental contract came up for a one-year renewal recently, the monthly rent dropped by one-third, from $2,700 to $1,800!
As further evidence of falling rents in the Bakken, here’s an example of a brand new, 931 square foot, 2 bedroom, 2 bathroom apartment home in Williston that is listed on Craigslist for a rent of $1,800 per month. Here’s a listing for 3 bedroom apartment in Williston for $1,550 per month. As recently as early 2014, some luxury two-bedroom apartments in Williston were renting for $3,200, but are now going for $2,600 per month.
Exactly as economic theory would predict, the supply of housing in Williston has increased significantly (see chart), the demand has stabilized and has been falling in recent months, and therefore lower rents and home prices are the inevitable result. Pretty much exactly like the market fundamentals that have resulted in falling oil prices!
5. International Jobs Mecca. The gold-rush-like energy boom in North Dakota’s oil patch has attracted workers from all over the world, and it’s now increasingly common to see workers in Williston from African countries like Sierra Leone, Liberia, Angola, Senegal, Tanzania, Guinea and Kenya who have jobs at McDonald’s, Fuddruckers, KFC, Walmart and the city’s convenience stores, hotels, and gas stations. According to this Aljazeera news report, “Before the boom, Williston was in no way diverse, but there are now native Spanish speakers and a Turkish community as well as immigrants from numerous African countries.” CNN reports that it’s not only Africans who have moved to Williston looking for jobs, there are now workers from Brazil, Peru, Australia and Germany. “You want to meet people from all over the world, this is the place to do it,” a local resident told CNN.
According to a 2012 WSJ article (“North Dakota City Draws Foreign Workers”), “With the nearby oil boom draining Williston of many of its service workers, businesses here are relying on a cultural-exchange program for foreign college students to keep the local economy humming. More than 500 foreign students—from Thailand, Jamaica and about a dozen other countries—are staffing nearly every hotel, car wash and fast-food place in town, tending to the troops of roughnecks from the oilfields.”
I noticed it more on my trip to Williston this year than my visit there in 2014 that the small city in western North Dakota has become as internationally diverse as many large metropolitan cities like Minneapolis-St. Paul. It’s a fascinating development that the recent boom in the Bakken oil fields producing an internationally-traded, global commodity – crude oil – has transformed a small, remote town on the North Dakota prairie into an internationally diverse community with a new global character. Exhibit A: There’s now an Asian fusion restaurant and sushi bar – Basil – in downtown Williston as just one example of the increasingly internationalization of the city.
Bottom Line: Overall, I think what impressed me the most about visiting the Bakken oil fields is the amazing technical sophistication involved in drilling for shale resources in reservoirs miles below the Earth’s surface, and then drilling out laterally (horizontally) for several more miles to extract oil from saturated shale rock formations that were previously inaccessible with the traditional drilling and extraction technologies. We can thank American petropreneurs like Continental’s Harold Hamm who persevered for decades until they finally “cracked the shale code” with revolutionary, breakthrough drilling and extraction technologies that have transformed America in an energy superpower. More than most people think, the oil and gas business is a very, very high-tech industry that uses cutting-edge, advanced engineering, geological and drilling technologies that continually advance and improve. The technological innovation that unlocked the nation’s oceans of shale resources hasn’t stopped but instead has actually intensified. New ideas, technologies and ways of cracking the shale code emerge daily, as America’s “petropreneurs” get better and better at what they do all the time.
I’ll write more about the technological sophistication of shale oil drilling and extraction in my next post, but will conclude for now by saying that the advanced drilling and extraction techniques used in the Bakken oil fields (and elsewhere) are truly marvels of modern engineering and the shale revolution is truly a “free market triumph” (to quote Harold Hamm).
View related content: Carpe Diem
Below is an excerpt from the “Iowa Car Crop” chapter in Steven E. Landsburg’s book The Armchair Economist – it’s based on a story Professor Landsburg learned from David Friedman. The story of the “Iowa car crop” manages to explain everything we need to know about international trade theory based on the insight that we can actually “grow cars in Iowa.” It’s an amazingly simple story and yet brilliant at the same time – “economics at its best” as Professor Landsburg reminds us.
There are two technologies for producing automobiles in America. One is to manufacture them in Detroit, and the other is to grow them in Iowa. Everybody knows about the first technology; let me tell you about the second. First you plant seeds, which are the raw material from which automobiles are constructed. You wait a few months until wheat appears. Then you harvest the wheat, load it onto ships, and sail the ships eastward into the Pacific Ocean. After a few
months, the ships reappear with Toyotas on them.
International trade is nothing but a form of technology. The fact that there is a place called Japan, with people and factories, is quite irrelevant to Americans’ well-being. To analyze trade policies, we might as well assume that Japan is a giant machine with mysterious inner workings that convert wheat into cars. Any policy designed to favor the first American technology over the second is a policy designed to favor American auto producers in Detroit over American auto producers in Iowa. A tax or a ban on “imported” automobiles is a tax or a ban on Iowa-grown automobiles. If you protect Detroit carmakers from competition, then you must damage Iowa farmers, because Iowa farmers are the competition.
The task of producing a given fleet of cars can be allocated between Detroit and Iowa in a variety of ways. A competitive price system selects that allocation that minimizes the total production cost. It would be unnecessarily expensive to manufacture all cars in Detroit, unnecessarily expensive to grow all cars in Iowa, and unnecessarily expensive to use the two production processes in anything other than the natural ratio that emerges as a result of competition.
That means that protection for Detroit does more than just transfer income from farmers to autoworkers. It also raises the total cost of providing Americans with a given number of automobiles. The efficiency loss comes with no offsetting gain; it impoverishes the nation as a whole.
There is much talk about improving the efficiency of American car manufacturing. When you have two ways to make a car, the road to efficiency is to use both in optimal proportions. The last thing you should want to do is to artificially hobble one of your production technologies. It is sheer superstition to think that an Iowa-grown Camry is any less “American” than a Detroit-built Taurus. Policies rooted in superstition do not frequently bear efficient fruit.
In 1817, David Ricardo—the first economist to think with the precision, though not the language, of pure mathematics—laid the foundation for all future thought about international trade. In the intervening 150 years his theory has been much elaborated but its foundations remain as firmly established as anything in economics.
Trade theory predicts first that if you protect American producers in one industry from foreign competition, then you must damage American producers in other industries. It predicts second that if you protect American producers in one industry from foreign competition, there must be a net loss in economic efficiency. Ordinarily, textbooks establish these propositions through graphs, equations, and intricate reasoning. The little story above that I learned from David Friedman makes the same propositions blindingly obvious with a single compelling metaphor. That is economics at its best.
MP: In a footnote to the “Iowa Car Crop” chapter is one of my all-time favorite economic quotes,”It is something of a miracle that individual selfish decisions must lead to a collectively efficient outcome.” Also simple and brilliant at the same time!