Drilling down: Oil prices, oil production, and production taxes in North Dakota

This paper examines the relationships between cycles in oil prices, oil output, and production tax revenue in North Dakota, the third-largest oil-producing state in the United States. The oil industry contributed over 50% to North Dakota's total tax revenue from 2018 to 2022, highlighting the importance of understanding these relationships. The analysis proceeds in two stages. First, we use the Hamilton filter to decompose the three time series to extract their cyclical components. Then, we employ Shannon transfer entropy, an information-theoretic non-parametric technique, to analyze the lead-lag relationships between these cycles. The results show significant information flow from oil price changes to oil production tax revenue and oil output, suggesting that oil market dynamics in North Dakota were primarily driven by price changes; the most considerable flow of information occurred contemporaneously. The results also point to limited feedback from production levels to prices. Overall, these findings underscore the critical role of oil prices in shaping the state's oil production and fiscal outcomes. • Oil production, prices, and tax revenue in North Dakota are analyzed. • The data are decomposed using the Hamilton filter to derive cyclical components. • Shannon transfer entropy is employed to study information flows between the cycles. • The most dominant information flow occurred from oil prices to oil production taxes. • There is limited evidence of delayed information flows from oil output to oil prices.