Is Denver the Houston of the Rockies — again?

Even greenie hotspots get their economic mojo from fossil fuels.

 

During the energy crises of the 1970s, President Jimmy Carter conspired to turn the Interior West into an American version of Saudi Arabia. Energy companies flocked to the region to take advantage of subsidies and streamlined permitting, and many set up shop in Denver, bulldozing the historic downtown buildings to replace them with skyscrapers and parking lots, while the suburbs sprawled out onto the plains in deference to the automobile. Denver, the Houston of the Rockies, even had its own oil-tycoon soap opera, Dynasty, that followed the foibles of the oil firms ColbyCo and Denver Carrington and the people who owned them.

Dozens of new office, residential and commercial structures have been built in downtown Denver in recent years. Many of the offices are occupied by the fossil fuel industry.
Photos and composite by Jonathan Thompson
Then, in the early 80s, the price of oil crashed, the boom withered and downtown Denver’s energy economy crumbled. Dynasty stuck around until 1989, a reminder of the days of easy money. And Denver set out on a decades-long struggle to get out of its boom-bust rut.

These days you can ride the light rail into lower downtown, an area that was half rail yard, half urban blight back when Dynasty was wrapping up, and look up at the bright blue sky reflected in the facades of brand new, steel and glass residential/office/retail buildings. A gleaming white arc-like structure stretches over the stop for the Amtrak trains, and beyond that, the century-old, but beautifully refurbished Union Station rises up, it’s neon telling you to “Travel by Train.” The vibe is futuristic hip, a far cry from that old quasi-Houston feel.

Or maybe not. See that new energy-efficient building adjacent to Union Station? It is the headquarters for Antero Resources, one of the top oil and gas companies drilling in the Marcellus and Utica shale plays in the East. Apollo Exploration employees look out at all the new buildings from a couple blocks away. Noble Energy and Encana Oil and Gas have offices on the other side of downtown; in between are Anadarko, Halcon Resources, EOG Resources, QEP Resources and plenty more. One estimate has 30 percent of Denver’s downtown office space occupied by oil and gas industry workers.

gdpoil-jpg
Many metros with healthy GDPs owe their success to fossil fuel development. Pumpjacks mark major oil plays in the West.
Bureau of Economic Analysis

Over the last couple of decades, Denver has transformed itself into a greener, transit-oriented city, and a trendy magnet for millennials. Fossil fuels have helped drive the metamorphosis. According to statistics recently released by the Bureau of Economic Analysis, Denver now has one of the healthiest gross domestic products in the nation. The metro area's GDP grew by 4 percent in 2013, about half of which is attributed to extractive industries. Close to 30,000 people are directly employed by the fossil fuel industry in northern Colorado, either in Denver offices or the oil fields of Weld County, which yielded some $4.5 billion worth of crude last year. Greeley, a cow-town north of Denver with a massive meatpacking plant, saw its GDP jump by a whopping 10 percent, and it has nothing to do with cattle.

The story’s similar across the West: The shale oil boom has pulled old energy towns — thrown into a slump by the sudden and massive deflation of natural gas prices a few years ago — back into the black, as well as creating some new ones. Among the top performing metros are Casper, Wyoming, Fargo, North Dakota, and Bakersfield, California. Jimmy Carter’s dream is finally coming to fruition: Domestic oil production has reached levels not seen since Blake Carrington and Alexis Colby were duking it out on Dynasty, and oil companies are raking in record profits — $1.8 billion for Anadarko last year, $2.6 billion for EOG Resources. Now if someone would just make another Western soap opera that includes wistful, moonlit dialogue scenes on drilling rigs.

Since all the big energy states tax the oil and gas that comes from the ground, those state governments should be flush, too. And in some cases they are. Alaska regularly pulls in around $4 billion per year from energy production taxes, and North Dakota’s severance tax revenues totaled more than $2.5 billion in 2013, or more than $3,500 per resident. Colorado, meanwhile, only got about one-sixteenth what North Dakota did (and just $28 per resident). That’s despite the fact that Colorado produces about one-fifth as much oil as North Dakota, and nearly ten times the natural gas.

Colorado, it turns out, has one of the lowest effective severance tax rates in energy country. A Headwaters Economics analysis found that Colorado would collect about $1.2 million in taxes from the same well from which Wyoming or North Dakota would collect $2.2 million. And a Colorado Legislative Council study earlier this year painted an even more disparate picture. When exemptions and tax credits are figured in, Colorado has an effective severance tax rate of just 1.5 percent, compared to North Dakota’s 10.7 percent.

severanctax-jpg
North Dakota's not only producing a lot more oil than other Western states, but it's also getting more out of it with one of the highest production tax rates in the nation.
Graphic by Jonathan Thompson using data from the Energy Information Administration and The Federal Reserve Bank of St. Louis.

In theory, that would lure drillers to set up their rigs on the Colorado rather than the Wyoming side of the state line, thus giving Colorado the jobs, as well as state and local taxes and impact fees, those rigs bring. But a look at drilling activity in oil and gas fields that cross state lines show no such preference — geology and land ownership, and perhaps regulations, appear to be more influential. Similarly, despite the fact that Colorado has a 4.63 percent corporate income tax, and Wyoming has none, oil companies tend to set up shop in Denver, not Cheyenne. Regardless, another study, this one out of the University of Michigan, found that many states have actually been lowering their tax rates as production has increased.

Though Colorado's severance tax rate is lower than Wyoming's, it doesn't necessarily lure drillers to the Colorado side of the line, as this map of oil wells (pink) and gas wells (blue) near the state line shows.
Energy Information Administration

Severance tax allocation varies from state to state — some goes to general funds, Wyoming sends kids to college, Alaska sends checks to everyone. Ideally some of the money's put away into a trust fund, or used in a way that makes the affected communities more able to weather the next bust. A repeat of the 80s crash is unlikely — the preceding boom was driven less by scarcity than by geopolitics, first, and then federal energy policy, including massive subsidies, which were discontinued by the Reagan administration. This boom is driven by drilling technology and the rising price of oil, which is fueled by burgeoning demand from China, India and developing countries. That's not likely to go away entirely, but every boom busts someday, and when it does, Colorado may regret throwing away all those would-be severance tax revenues.

But when that day comes, Denver will be far better prepared to deal with it. Despite energy's outsized role, the economy is far more diversified than in the early '80s — finance, high tech and so-called cleantech, which includes wind and solar companies, are also big sectors. Plus, public funds have been invested wisely in infrastructure, transportation and in making the city a desirable place for companies — including oil companies — to relocate, with or without high taxes.

And as long as the oil and money are flowing, those script writers may as well start working on a Dynasty for the millennial set.

Jonathan Thompson is a senior editor at High Country News.

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