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What impact will the new oil deposit in North Dakota have on gold prices?

December 21, 2012, 12:00 PM Przemysław Radomski , CFA

I'm curious how the new apparently endless oil deposit in North Dakota influences global economies, gas prices, and of course if it will have any influence on the US economy. Could it help America to reduce its debt? What impact will it have on gold prices?

In 2008 an oil boom started in North Dakota. At this time technological advancements made it possible to extract oil from well-known fields at acceptable costs. Since then, the annual oil production figures have been ever-rising, from 62.8 million barrels in 2008 to 152.9 million barrels in 2011 (a 143.5% rise according to North Dakota State Government data). Oil is being extracted mainly in the area called the Bakken Formation and in 2008 the U.S. Geological Survey estimated Bakken's recoverable oil resources at 3.0 to 4.3 billion barrels. These would be the barrels that could actually be extracted from the rock and later sold.

If we take these estimates, and note that the state government collects taxes of approximately 11.5% on every extracted barrel of oil, assuming the price of a barrel of oil is $100, we arrive at an estimated $34.50 to $49.45 billion. Enormous as this amount may be, it pales in comparison to the current $16.37 trillion U.S. debt burden. A quick calculation shows that, even if oil tax revenues from the Bakken Formation were used in their entirety to pay for federal obligations, they wouldn't reduce the debt pile by more than 0.3% (!). And this amount could be paid off only under the assumption that all the oil was available today. You can probably see that tax revenues from North Dakota oil won't pay for the U.S. debt.

On the other hand, the oil boom can help the U.S. economy on a regional level. As of October 2012, North Dakota had the lowest unemployment rate in the U.S. at 3.1% (Bureau of Labor Statistics). According to a recent piece of news the state budget surplus is currently estimated at $1.6 billion. Of course, the oil boom brings other challenges, like environmental pollution. But on the whole it has so far helped North Dakota to be largely unaffected by the economic crisis.

Conventional wisdom has it that increases in the price of oil fuel price increases in all goods and, to some extent, the price of gold. So, if an oil boom drove oil supply higher and prices lower, it could have negative implications for the price of gold. Does this have to be the case? Absolutely not – there have been times when oil was in a downtrend and precious metals rallied nonetheless. You will find much more detailed analysis of the gold-oil link in our reports section.

During the 2008-2011 period, oil from the Bakken Formation accounted for about 39.0% of the growth in US oil production. The overall growth of oil production amounted to 12.6%. However, during the same period, the price of Brent oil rose by 11.4%. This shows that, even in times when the oil supply in the U.S. increases, the price of oil can go up. Because of that, we don’t see the significant oil supply expansion in North Dakota as a factor that can have decisive long-term implications for gold.

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