DENVER/HOUSTON (Reuters) - Alaska, New Mexico and other states that benefited most from the nation’s energy boom may soon need to patch holes in their budgets due to a 45% dive in U.S. crude prices this year and spending plans built on much higher prices.
Revenue from oil taxes and state leases have been at risk for weeks as oil prices slid on fears that economic fallout from the coronavirus outbreak would dent global demand. Then on Monday, oil had its biggest one-day drop since 1991, as Saudi Arabia and Russia pledged to pump full bore to regain share lost to U.S. shale producers.
U.S. crude futures sank on Monday as low as $27.34 a barrel, far below estimates when state budgets were set last year. Texas had forecast about $58 a barrel, Alaska $66 for North Slope crude and Louisiana estimated $55 a barrel. All estimates are at least $21 above current levels for those grades.
Alaska, which gets about 34% of its operating budget from oil, on Monday imposed a hiring freeze and out-of-state travel ban, citing the hit to state finances from oil price drops.
The state already was facing a $1.5 billion budget deficit, said Mouhcine Guettabi, an economist with the Institute of Social and Economic Research at the University of Alaska Anchorage.
“A shock like what we’re experiencing makes it clear to the legislature and the general public that the current situation is unsustainable,” he said.
Louisiana has projected $595 million in oil and gas revenue for the next fiscal year, an amount “that probably will go down,” said Greg Albrecht, chief economist for the Louisiana state legislative fiscal office. For every $1 move in the average oil price, state revenues change by $11 million, he said.
More than 60% of North Dakota’s state budget comes from oil and gas, said Ron Ness, president of North Dakota Petroleum Council. The price war “is going to be a big challenge if it lasts more than a short period of time,” he said.
New Mexico, which gets about a third of its revenue from oil and gas, was forecasting a surplus and boosted its state spending by 8% after becoming the third largest oil-producing state after Texas and North Dakota.
It would take several months of lower prices to require budget cuts, but every $1 drop in oil prices eliminates $20 million in state revenue, said Larry Scott, owner of Lynx Petroleum and a Republican state legislator from Hobbs, New Mexico. “We would be more susceptible than most everyone else,” given the state’s dependence on the industry.
Texas, the largest U.S. oil producing state, had expected to receive $5.4 billion from oil and gas.
“The ultimate impact on the budget won’t be known for a while,” said Tom Currah, the state’s chief revenue estimator, noting Middle East producers will also suffer. The state has taken steps to reduce oil’s impact on finances by assigning oil revenue to budget stabilization and highway accounts, he said.
Colorado, the fifth largest oil producing state, could revisit its spending if oil prices remain in the $30 a barrel range.
“If prices remain low enough, long enough, it will negatively impact Colorado’s tax base,” said Dan Haley, CEO of the Colorado Oil and Gas Association.
Oklahoma is already pinched by falling prices, said David Blatt, a public policy professor at the University of Oklahoma and former state senate fiscal analyst. The latest drop “is going to create real concern in Oklahoma” over spending.
Local oil prices are around $30 a barrel, said Mike Cantrell, president of the Oklahoma Energy Producers Alliance, who called that level unsustainable.
Reporting by Liz Hampton in Denver, Jennifer Hiller in Houston and Yereth Rosen in Anchorage; editing by Gary McWilliams and David Gregorio