By Rob Nikolewski │ Watchdog.org
The skydiving price of gasoline is good news for drivers across the country, but it’s causing headaches for budget directors in oil-producing states that are now revising their numbers downward and hoping the that prices stabilize quickly.
“I haven’t seen anything this rapid in my time,” Oklahoma Finance Secretary Preston Doerflinger told Watchdog.org. “I don’t think we’ve seen anything in recent history this dramatic.”
The budgets in oil-rich states count on the revenue that’s generated from the oil and gas industry. In addition to the money generated from sales taxes that have accompanied the boom times that have come as a result of technological advances from horizontal drilling and hydraulic fracturing, the industry also kicks in millions of dollars each year in severance taxes.
For example, a recent study showed that 31.5 percent of the general fund in New Mexico is attributed to taxes, royalties and fees generated each year by the oil and gas industry.
But with the price of a barrel of oil plummeting from $107 a barrel to under $60 in the space of five months, states that had been counting on a nice chunk of change from energy companies are now expecting less money coming their way.
“Maybe as equally important as oil price and the ramifications of depressed prices on our economy is the possible ripple effect if the energy industry were to shrink in our state,” Doerflinger said. “When I say that, I’m talking about income taxes and other types of revenue sources that can be affected by not having as many energy jobs in the state.”
Here’s a quick look at what’s happening in a number of energy states:
No state has been transformed more by what’s been called the “shale revolution” than North Dakota.
The state’s economy has soared in the past eight years as thousands of workers rushed to take jobs in oil and natural gas fields in the Bakken formation. North Dakota has the lowest unemployment rate in the country and jobs practically go begging. In September, the state had 2.89 open jobs for every unemployed worker.
But the steep decrease in price is starting to be felt, with the rig count dropping from 191 in October to 183 as producers pull back.
“It’s not like we’re going to see a drastic, sudden drop, but we’re going to see all of the major companies laddering their rig count down as we walk through January, February, March and maybe further as oil prices stay down,” Lynn Helms, director for the state’s Department of Mineral Resources, told the Forum News Service.
But North Dakota puts 30 percent of oil taxes into its Reserves Legacy Fund, which is expected to be worth $3.66 billion by next June. The state also has a Budget Stabilization Fund of just under $700 million.
“We have been very, very careful to figure out what the ongoing revenues are and make sure that ongoing expenditures are less than what the ongoing revenues are,” Sheila Peterson, director of the fiscal management division at the North Dakota Office of Management and Budget told Watchdog.org.
This summer, North Dakota officials planned their budgets on an assumption of oil at $90 a barrel. They adjusted it late last month to between $72-$82. Peterson said the numbers may be revised again when the North Dakota Legislature meets in February and March.
The Lone Star State produces more oil than any other state, and industry officials are cutting back in the wake of the drop in global prices.
ConocoPhillips, headquartered in Houston, announced last week it was cutting its capital budget 20 percent for the upcoming year.
“We have a very diversified economy, but oil and gas is still our jewel,” James LeBas, former chief revenue estimator for the state and now a consultant for private business, told Watchdog.org. “It’s our black pearl.”
Some $5 billion in direct production taxes get pumped into the Texas economy from the oil and gas industry, and 75 percent of that money goes to the state’s rainy day fund, LeBas said. Texas officials still are trying to determine how much of a hit the state will take if prices stay low for an extended period of time.
“I don’t think it will be as severe (as other states), but it’s going to be real,” LeBas said in a telephone interview.
“A lot of the state’s economy is rolling on these oil dollars and if those are slashed, then the housing boom is going to tail off. The construction boom is going to tail off. The servicing and manufacturing that serve oil and gas will be curtailed and that’s where the bigger impact comes to us.”
No state has attracted a greater influx of people in recent years than the Lone Star State, which has actively recruited companies with low taxes and a business-friendly atmosphere.
“I think this is seen as a correction, that it’s temporary,” LeBas said. “That is, $100 oil could not last forever, but neither will $60 oil. I think everyone expects that this will have a cooling effect on the state economy, but there will be plenty of revenue to finance the state budget.”
The Sooner State’s annual $7 billion budget was modeled on the presumption of oil averaging $86.99 a barrel, Doerflinger, the finance director said. Fortunately, the oil boom in Oklahoma has helped the state build up a reserve fund of $535 million in the past three years.
“In the short term, I think we’re positioned to weather any depressed prices for six to eight months,” Doerflinger said in a telephone interview. “Beyond that, if they remain depressed, it begins to get problematic.”
The Oklahoma Board of Equalization will meet later this week, and it is expected to revise downward the estimated oil price for 2015.
“I don’t know yet what that number will be,” Doerflinger said. “But it will be significantly less given where the current prices are at.”
The Permian Basin extends into eastern New Mexico, where communities towns like Hobbs have become boom towns. That’s welcome news in a state where the economy has been flat for years.
In August when oil prices were at $92 a barrel, the New Mexico Department of Finance and Administration was estimating the state’s general fund was on pace to rake in an additional $285 million. But on Dec. 9, with oil prices at $62, a DFA official told legislators that the figure would be revised down to $141 million.
That’s a big cut, but it still translates into a 2.3 percent increase in the state budget over last year.
The downturn in oil prices is coming at a bad time for Alaska. Even before the recent dip, there were warnings of a budget deficit of more than $3 billion.
If prices stay low for an extended period, it could spell trouble. There’s even talk of instituting a personal state income tax — something Alaskans haven’t had since 1980 — to help plug the hole.
On the other hand, Alaska has built up $12 billion in reserves. There’s also $7.1 billion in the state’s Permanent Fund, although it’s considered political suicide to touch the dividend checks Alaskans receive from it.
“It’s not quite the end of the world,” Scott Goldsmith, professor emeritus of economics at the Institute of Social and Economic Research, told the Alaska Dispatch News. “Maybe we can see it from here, but it’s no cause to panic.”
How low and how long?
The boom in the U.S. has led to a greater supply of oil in the global market, which has put downward pressure on prices. But the most recent nose dive is attributed to a decision made Nov. 27 by the Organization of the Petroleum Exporting Countries — known as OPEC — to keep on pumping.
That’s increased the supply even more.
Although OPEC leader Saudi Arabia denies it, the move has been widely interpreted as an attempt to starve off U.S. shale producers by drastically undercutting the price and preserving the Saudis’ market share.
Production costs to extract oil are lower in places like Saudi Arabia, while U.S. shale producers — using horizontal drilling techniques — have higher built-in expenses.
“In my opinion this is very definitely an attempt to disrupt the energy renaissance that’s happening in this country,” Doerflinger said.
How long the price war will last — and where the price will stabilize — is an open question.
And a number of OPEC countries such as Venezuela, Nigeria and Iran need prices north of $120 a barrel to keep their struggling economies afloat.
“I don’t think (OPEC) can afford to keep it this low either for very long,” Doerflinger said. “If this continues for Venezuela, they go bankrupt … That causes me to be cautiously optimistic that prices will not remain depressed for a prolonged period of time.”