North Dakota now has options

North Dakota State Roundup

Published September 1, 2003  | September 2003 issue

House Bill 1441, passed in the North Dakota Legislature this session, allows the state to purchase oil put options, that is, an option to sell at a fixed price within a specified time, as a way to protect state tax revenues against precipitous decreases in oil prices. The bill, effective July 1, expires in 2005.

Options have long been used by farmers to guarantee agricultural prices, but beyond North Dakota, only Louisiana and Texas currently have measures allowing their governments to purchase put options for oil. Last fall, Alaska's Department of Revenue also looked at options, but the Legislature did not follow through with legislation. Even among the states that have passed such measures, the options have been used only very little by Texas, and Louisiana has never used its ability to buy the options. Ron Henson, an assistant Louisiana state treasurer, attributed the absence of any oil option purchases in his state partly to legislative concern and hesitation over perceived market risks of using options as a state financial tool. While some take pause at the thought of entering the state into the variable market of price options, others see oil options as a means to in fact remove risk and volatility in state revenues from oil taxes—much like a form of insurance.

At the passage of HB 1441 in North Dakota, Gov. John Hoeven was glad to have his state's options open. However, it is not a sure thing that North Dakota will end up actually using its newest financial tool. The purchase of options is indeed optional, and the likelihood of their use seems to have recently decreased. According to Steve Cochrane, executive director of the North Dakota Retirement and Investment Office, since the bill's passage several questions have arisen among the state agencies involved over who exactly would manage any possible purchases of the options, as well as over where the appropriations for such measures are to come from. Currently, the pertinent agencies are working together to resolve how and if the policy can be implemented, but because of the questions still facing the state, the actual use of oil options by North Dakota might become unlikely—for quite some time, at the very least.

Benjamin Knelman