Spotlight on Economics: Addressing Western N.D. water needs with water markets

Robert Hearn
NDSU Agribusiness and Applied Economics Department

Spotlight on Economics: Addressing Western N.D. Water Needs With Water Markets

Western North Dakota has faced a dramatic increase in water demand during this decade’s oil boom. Can state water managers keep adjusting to meet the state’s water needs?

By Robert Hearne, Professor, NDSU Agribusiness and Applied Economics Department

During the past 25 years, much of my research has been on the economics of water markets. Economists continue to emphasize that water is an economic good especially in the western U.S., where water is scarce and therefore valuable. Economic instruments, such as water pricing and water markets, are promoted because they can lead to a more efficient distribution of water across multiple uses.

In California, we expect water market transfers to increase with the current drought. However, there is no single answer to California’s drought short of a sustained period of high precipitation.

Western North Dakota has faced a dramatic increase in water demand during this decade’s oil boom. Both industrial and residential demands for water have increased with the expansion of fracking and oil production, along with population growth.

Since the region is semi-arid, water shortages and competition for scarce resources would be expected in the region. Of course, the Missouri River and Lake Sakakawea bisect North Dakota’s Bakken region. But the U.S. Army Corps of Engineers controls the right of way around Lake Sakakawea and can effectively prohibit withdrawals from the lake. It has released a plan to charge oil drillers and producers for Lake Sakakawea water, which the state vehemently opposes.

Economists would expect that expanded demand facing constrained supply would provide incentive for water market transactions. North Dakota’s water law is based upon prior appropriation, which allows for water market transactions for permitted water. Thus, the new demand for water could be met with market transfers from lower-value uses.

Irrigation accounts for more than 50 percent of North Dakota’s water use and is often a low-valued use of water in relation to municipal and industrial uses. Generally, irrigation water in western North Dakota is infrequent and comes from shallow and often overused ground water sources. Also, North Dakota’s Century code prohibits water market transfer of permitted water rights from irrigation to the lower-priority industrial sector.

Sometimes water markets can be flexible and state water managers can adjust to the needs of the times. Although water markets in the western U.S. and throughout the world tend to feature fewer permanent transfers of water use rights than economists would expect, the temporary transfer of a specific volume of water has become more frequent. These spot markets for water have achieved a lot of the efficiencies that are expected from water markets but do not change long-term control over the resource.

There was a period from 2010 to 2014 when rapid drilling and fracking in the Bakken caused numerous shortages of production inputs, labor, equipment and water. A number of measures to address this shortage of water have minimized the need for transfer of water rights. The State Water Commission has permitted numerous temporary water permits and allowed temporary transfers of water from irrigation to industrial uses. These are common-sense measures.

Permitting the temporary transfers from irrigation is allowing a certain type of water market transaction to occur. In the case of these temporary transfers, volumes of water are moved from lower-valued uses to higher-valued industrial uses. Although the immediate needs of the oil industry were partially met, the long-term viability of the agricultural land in crop and livestock production remains.

Another fortunate measure was the expanded use of North Dakota’s Resources Trust Fund for water-related projects. This fund was approved via a referendum during the 1990 elections and is supported by proceeds from the state’s oil extraction tax. In the early 2010s this fund expanded greatly with increased oil production. With the Bakken oil boom, this fund was tapped to support regional water development projects, including the Western Area Water Supply Project (WAWS), Northwest Area Water Supply Project (NAWS) and Southwest Pipeline Project (SWPP).

Both the SWPP and the NAWS projects are part of the Municipal, Rural and Industrial (MR&I) Water Supply Program, created by the Garrison Diversion Act of 1986, to bring Missouri River water to North Dakota communities. Because these projects are federally supported, they have right of way to access Lake Sakakawea water.

The NAWS project includes an interbasin transfer and has been delayed by repeated court challenges. The WAWS project also includes an interbasin transfer but has proceeded without federal funding and has avoided delaying court challenges. Both the WAWS and the SWPP have supplemented their funding by operating water depots and selling water to oil drillers.

As the oil boom abates with lower prices, North Dakota should look to maintain a long-term energy industry in the Bakken region. North Dakota was forward thinking when it developed the Resources Trust Fund for long-term water financing in 1990. The expansion of the regional water projects certainly will help foster the long-term expansion of economic activity in the region.

The State Water Commission was also very practical when it allowed for temporary transfers of water from irrigation to the oil industry. The efficiencies of water markets are enabled with these temporary transfers. In the future, it may be necessary to address the prohibition against market transfer of water from irrigation to industry, eliminating the constraints to efficient water use.

–NDSU Extension