Falling oil prices could hit Wyoming, North Dakota, and Oklahoma hardest in the US

The price of oil is dropping sharply. And a handful of US states reliant on oil and gas drilling could get hurt as a result. Wyoming, Oklahoma, and North Dakota face the biggest economic risks. But so do Alaska, Louisiana, Texas, West Virginia, and New Mexico.

There are a few reasons for that: The US fracking boom has produced a glut of new crude over the years. But the oil industries in conflict-torn countries like Libya and Iraq have now begun to rebound somewhat. And demand is weakening in places like Germany and China. That’s all nudging prices downward.

So what do falling oil prices mean for the United States? It varies. For many consumers, it will mean cheaper gasoline at the pump, which in turn means people now have more money on other things. That’s good economic news for them. But a price drop is bad news for oil producers. That includes countries abroad like Iran and Russia. But it also includes a handful of US states.

The price plunge poses economic risks for states that are particularly dependent on oil drilling — particularly Wyoming, Oklahoma, North Dakota, Alaska, and Texas. Back in October 2013, a report from the Council on Foreign Relations took a look at which states were most sensitive to changes in the price of oil

Check out the map below. When crude oil prices increase, the states in green end up benefitting — among other things, higher prices make it profitable to have more drilling production. That means higher incomes and more jobs. (The states in red, meanwhile, get hurt slightly by rising energy costs.)

States in green get hit hardest by falling oil prices:

Now we’re in a world where prices are falling, so everything is flipped. The states in red above all benefit from lower energy costs. Meanwhile, the green states get hurt — as oil prices plunge, some of the more costly and difficult drilling endeavors in shale formations become unprofitable and have to shut down. That increases unemployment.

Here’s the bottom line: “[F]alling oil prices would cause overall employment losses in Wyoming, Oklahoma, North Dakota, Alaska, Louisiana, Texas, West Virginia, and New Mexico, with the greatest percentage losses in the first three.” (Note that Texas is easily America’s biggest oil producer, but it’s not the hardest hit, because its economy is more diversified.)

This sort of boom and bust is hardly unprecedented. Between 1979 and 1982, global oil prices increased tenfold thanks to decreased output after the Iranian Revolution. Texas, a major oil-producing state, benefitted hugely — growing at a torrid 7.5 percent annual rate during that time. But then prices crashed in 1982, and Texas’ economy crashed along with it, falling into a deep two-year recession.

The authors of the CFR report, Stephen Brown of the University of Nevada, Las Vegas and Mine Yucel of the Federal Reserve Bank of Dallas, note that many US states can weather large swings in the price of oil fairly well. California is the nation’s third-biggest oil producer, but it has a huge, diverse economy alongside those wells.

“At the same time,” the authors note, “the growing prominence of energy production can make states with small, undiversified economies more susceptible to an economic downturn during an energy price decline.”

(Thanks to Michael Levi on Twitter for pointing out the CFR study.)