State Budgets Reeling From Low Oil Prices
There has been a lot of attention paid to the harm that the oil industry is experiencing in the face of declining oil prices, but there has been little talk about how strained state budgets may become due to lower oil tax revenues.
Several states in the U.S. that are overly dependent on oil to meet their budget forecasts are starting to come to grips with the fact that their spending plans may not work in a low-priced environment. Oil prices have dropped by more than 30% since the summer, with WTI prices dropping below $75 per barrel in the third week of November.
That has officials from several states — namely Texas, Alaska, Louisiana, New Mexico, North Dakota, and Oklahoma — scrambling to make the math work. Alaska in particular will see a gaping hole between what it forecast for revenue collections and what it will ultimately be able to collect. That is because it relies on oil taxes to meet 89% of its collections.
Even worse, some states were much more optimistic about oil prices than others, setting up their budgets for a big disappointment. For example, Alaska’s budget assumed that oil prices would average $106.61 per barrel for the year and $105 next year. With actual prices way off from that, Alaska may need to make some dramatic revisions to its spending plans.
For now, state officials from Alaska are maintaining that this isn’t something the state can’t weather. “Our state is not in a situation of deficit spending and in no danger of being in one,” John Tichotsky, the state’s chief economist, told Bloomberg in an October 28 interview.
Texas, the largest oil producer in the U.S. by far at 3.1 million barrels per day (as of August), is in much better shape. While it has more to lose, Texas has a much larger and much more diversified economy than other oil-producing states. Oil revenues only make up about 8% of its tax take.
Not only that, but after experiencing a massive bust in the 1980s, when oil prices tanked, Texas has since decided to divert much of its oil revenues to a rainy day fund, meaning not only has it built up cash reserves since then, but it also doesn’t design its annual budget around short-term fluctuations as much as it could. Even better still, unlike Alaska, Texas drew up its latest budget on very conservative oil price estimates — about $82 per barrel for 2014 and $80 per barrel in 2015, not too far off from current prices.
But not all states are as well-positioned as Texas. Louisiana is selling more debt in order to cover the unexpected shortfall. It offered $200 million in bonds, enough to cover a mid-November revision of its lower-than-expected budget revenue. The state is expected to take in $171 million less than originally projected through June 2015.
New Mexico is also in the line of fire. It may take in $100 million less than anticipated, which could prevent hoped-for tax cuts. “We think the budget is simply not going to be big enough to accomplish major tax reform,” New Mexico’s Finance and Administration secretary, Tom Clifford, said on November 19.
And it is not just U.S. states that are feeling the pinch. America’s massive oil producing neighbor to the north is also taking a hit. The eastern province of Newfoundland and Labrador might be the most exposed, as it is already running a deficit, according to Moody’s Investors Service. Lower revenues will exacerbate its budget woes.
Alberta could weather low oil prices better than others, despite making up the lion’s share of Canadian oil production. That is because it built up cash reserves during good times. Still, the drop in oil prices is inflicting real pain. The province loses $215 million in revenues for every $1 drop in the price of a barrel of oil. Alberta’s premier, Jim Prentice, reiterated that the province will balance its budget even with low prices but warned that “this is not business as usual.”
In an address on November 15, he said: “We need to steel ourselves. We will face this challenge together.” He went on to add, “If we are in a low-price environment for an extended period of time … there will be consequences, clearly.”
Originally written for OilPrice.com, a website that focuses on news and analysis on the topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.