"Tight Oil" revolution: a game changer for Montana's economy.

• Author: Barkey, Patrick M.

In the economic forecasting business we are constantly trying to understand how the forces and trends in the economy will shape the immediate future. So many things that can affect our future are unknowable when forecasts are made, making the prediction business hard enough when trends remain stable. But when events come along that change the trends themselves, economic forecasters truly learn humility.

One of those kinds of events has occurred in the oil and gas industry, and it has made a mockery of projections of the energy future made only 10 years ago. The event, of course, is the discovery, refinement, and large-scale implementation of processes that extract oil and gas deposits directly from the source rock through horizontal drilling and hydraulic fracturing. In industry jargon, this has become known as "tight oil."

In 2005, less than 2 percent of U.S. crude oil was produced this way--in 2013 the share was more than a third, and it continues to grow rapidly. The increases in gas production are no less startling, with unconventional wells now producing about 28 billion cubic feet per day. And for a state like Montana, which sits immediately astride the Bakken/Three Forks formation that has seen so much drilling activity, it has been a sea change for the entire economy.

Of course, forecasters are busy making new projections that take these events into account. That's what forecasters do. But in doing so we are struck by how different the basic trends we use in making our forecasts today are, compared to the ones we used only a few years ago. And how different the world would look today if the revolution in oil and gas production technology had never occurred and the economy had remained on its pre-tight oil trajectory.

So join me as I take you on this thought exercise, to imagine a world--and a Montana--where tight oil didn't happen. This isn't a rigorous analysis--the numbers presented here are mostly back-of-the-envelope stuff. But the story even these rough figures tell is compelling.

Changes in the Oil Industry

Let's start with the oil and gas industry itself. Before the tight oil revolution, the depletion in conventional oil reserves dominated the production statistics for petroleum, particularly for the contiguous 48 states. The year 2005 was one where U.S. production of petroleum and other liquid fuels bottomed out at about 5 million barrels per day (bpd), down by almost half its total in the year 1970. 2005 was also a year in...