Outrun Change

We need to learn quickly to keep up with the massive change around us so we don't get run over. We need to outrun change.

Williston moving forward with plan to shut down crew camps. Visible fallacy in city’s reasoning.

Mancamp near Stanley. Photo by James Ulvog.

Mancamp near Stanley. Photo by James Ulvog.

First read of the action to close all crew camps was approved 3-2. I previously discussed Williston considers driving up housing prices.

11/11 – AP at Bakken.com – Williston moves closer to banning crew camps in city limits By a vote of 3-2, the Williston city commissioners gave preliminary approval to plan to end all man camps by July 1, 2016.

11/10 – Amy Dalrymple at Dickinson Press – Williston city commissioners vote to shut down crew camps – The motion was approved by commissioners Tate Cymbaluk, Christ Brosteun, and Howard Klug (mayor). It will require a second reading and approval.

Move would shut housing with 3,600 beds. Target Logistics, with a large camp on the north side of town, is currently 70% occupied.

Oil executives said there is still a need for temporary housing for crews that move around based on where they need to work this week or this month. Their concern is workers will leave the area for a location with stable temporary housing.

Apartment owners are concerned about prices dropping and not as many tenants renting.

One representative said his project was developed when a two-bedroom two-bathroom apartment was going for $2,700 a month. He says average rent in the city is now $1,400 a month for a comparable unit. (Notice the switch in units: his building then versus an average today.)  The project was constructed and financed based on getting $2,700 a unit.

In addition, apartment buildings are currently running 60% occupancy, according to the same representative.

I am sure the apartments were funded by lenders and sold to investors on the basis that they would continue to have near 100% occupancy.

The implied idea is that removing competition of 3,600 beds would increase the occupancy rates and increase the rents for all apartments and hotels.

The future is not a straight line projection from this year

I see at least three places in the discussion where there is a catastrophic failure in thinking. One deals with unintended consequence and two deal with straight-line forecasts.

First, the unintended consequences.

The assumption is that everyone living in man camps will rent an apartment on a one-year lease or move into a far higher cost hotel room. There is a good chance that workers will just leave the area. Another possibility is lots of guys may move to man camps further outside the city. Unintended consequence could be that apartments and hotels would not see any increased occupancy.

Second, projecting the current situation into the distant future.

One of the basic lessons I learned a long time ago in grad school is you cannot just take what happened recently and project that trend out into the distant future.

Two severe flaws I see above. The apartment developer assumed that 100% occupancy at astronomical rental rates would continue for the next 23 years in order to cover the large mortgage until it matures. He said a specific project needs that cash flow to cover the mortgage (for the next two decades). That is a horrible assumption. Basic economics (or plain common sense if you prefer that reasoning) says there will be a lot of infrastructure built and eventually occupancy and rental rates will settle at a reasonable level. The disruptions seen in the last four or five years will eventually work themselves out.

The second set of players making the false assumption that what happened this year will continue forever is the city commissioners. They are assuming there will never, ever be another surge in production. Drilling will continue forever at the rate of around 60 or 70 rigs in the state.

The consequence of that fallacy is that a surge in drilling to 150 rigs or a sustained increase to 100 rigs or a quick completion of the over 1,000 uncompleted wells on the fracklog would again put workers in the place of having to sleep in their cars. Three commissioners are assuming the current worldwide demand for oil, worldwide supply of oil, and price of crude that we see today will continue into the next decade or two.

Banning crew camps will make it extremely difficult to handle any increase in drilling or production over what is happening in the fall of 2015.

On the other hand…

Perhaps making future oil development far more difficult is the intentional goal, not an unintended consequence.

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