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Strong economic growth continues in Montana.

Article Excerpt
Last summer, the Bureau of Business and Economic Research did something we have never done before. We issued a revised forecast, primarily reflecting the oil boom in eastern Montana. Obviously, we are becoming much more bullish about the Montana economy.

The numbers are really extraordinary. In 2003, 2004, and 2005 we had growth greater than 4 percent. The last time there were three consecutive years with 4 percent or more growth was during the late 1970s. Now, we are forecasting 4 percent or more growth for the next couple of years.

The big news of the last few years has been the rise in oil prices. In Montana, that has led to an oil boom in the eastern part of the state. Most people don't realize that other commodity prices have risen just as fast, or even faster, than oil. Copper is now at an all-time high. Lead, zinc, and other metals have also risen.

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These price increases have had impacts in Montana. The Montana Resources mine in Butte reopened, as did the copper mine in Troy. Both of these mines are now operating at capacity, and they contributed to the fast growth in 2004 and 2005.

These strong commodity prices reflect worldwide fundamentals and are likely to continue. Further, prices this high are very likely to stimulate industry investment; there is a good chance some of it will occur in Montana.

To understand what's happening, we have to start with worldwide economic trends. Where are the fastest growing economies in the world? With the exception of the United States, it is not the developed countries. The fastest growing parts of the world are the developing nations. And China stands out.

How big is the Chinese economy? Looking at the GDP figures, it looks to be sixth in the world and about 12 percent of the U.S. economy.

But once we get away from the developed countries, the economic numbers start to get fuzzy. Economists have a way to correct for this fuzziness. It is called purchasing power parity. When we look at GDP expressed in purchasing power parity, we see that China jumps to No. 2, at about one-half of the U.S. economy. So this means we have a very large economy that is growing quickly.

What is China producing? The Chinese economy is very different from the U.S. economy, or from those of other developed nations. In fact, it is almost the mirror image of the U.S. economy. About one-quarter of the U.S. economy is concerned with goods production and three-quarters with services. It is just the opposite in China, which is about one-third services and two-thirds goods.

So, we have a rapidly growing, large economy producing mostly manufactured goods. This means a growing demand for inputs, or primary commodities, into manufacturing. Montana, with an abundance of copper, zinc, and nickel, could benefit from China's growing economy and demand for commodities.

Recently, the price of oil started to retreat from its highs in the fall of 2005. This is also true for other commodities. Forecasters believe metal prices in 2007 will be less than they were in 2005 and 2006, but still well above what they were in 2000.

In summary, there is good reason to believe that metal prices will remain about one-third to one-half higher than what they were at the beginning of the decade. These prices are high enough and the period long enough so some industry response is almost inevitable.

And that's not the end of the good news. Improved fundamentals are likely to increase demand for Montana coal.

Almost all Montana coal is used for electricity generation. The market for Montana coal is basically the northern-tier states as determined by the rail line going out of Montana. The rail lines going out of Wyoming mostly go to the south and east, and these states are best served by Wyoming mines.

There was an electric generation building boom in the northern-tier states during the 1980s. That was when Colstrip III and IV were constructed. Almost nothing has been constructed in the last 20 years. We are now running out of capacity, and new plants are likely to be built.

In addition to electrical generation, there is also the possibility of directly converting the coal into oil or natural gas. The possibility of gasification or liquefaction was proposed in the 1970s, but never materialized as gas prices went back down. But today's high energy prices once again make this a possibility. Montana...

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