Low oil prices dent US state budgets: Analysis
17 Dec 2014
Houston, 17 December (Argus) — Low crude prices are taking a bite out of revenues for top US oil-producing states and prompting officials to recalibrate expectations.
Oil prices are at five-year lows after falling by nearly half since the summer, pinching budgets for big oil-producing states like Louisiana and Alaska.
In Louisiana, the 9th-largest oil producing state, the fiscal year 2015 revenue forecast has been cut by $171mn, prompting the state to eliminate 162 vacant positions, reduce contracts and freeze expenses for all state agencies. About $90mn-$95mn of the deficit is attributed to the drop in oil prices. Severance and royalties on the oil and gas industry comprised 13pc or $1.4bn, of the state's budget in fiscal year 2014.
"As we create our budget for the next fiscal year, we are concerned about the impact of falling oil prices," said commissioner of the administration Kristy Nichols, noting the state is reviewing every part of its budget to prioritize health care and education.
The state last month forecast that severance revenues, revenues from taxes on oil and gas production, in the fiscal year 2015 will total $761.8mn, down from the previous forecast of $808.5mn. Royalties, payments based on production from state-owned lands, are expected to total $436mn, down from $482.6mn. However, those projections are based on an expected oil price of $81.33, compared to $95.80/bl used in May projections. The figures will likely be revised down further in January, potentially widening the deficit.
Each $1/bl drop in the annual oil price impacts Louisiana's state revenue by $12mn, said Greg Albrecht, chief economist for the Legislative Fiscal Office.
Alaska had projected prices at $105/bl and overall revenues at $5.4bn for the fiscal year 2014, but has since slashed its expected revenues to $2.6bn for the 2015 fiscal year, a year-to-year drop of $2.8bn. Petroleum revenue will be $4.8bn in fiscal 2014, or about 88pc of the state's revenues, but that is expected to decline to $2bn, or 79pc in the fiscal year 2015, and $1.6bn, or 74pc in fiscal year 2016.
Lawmakers and state officials are "recognizing the change to revenue environment, and there will be significant discussions about cutting the budget during the course of the legislative session," Office of Management and Budget senior economist John Boucher said. An amended budget from the state is due early next year.
After 2016, oil prices are expected to recover to above $90/bl. The state now expects Alaska North Slope (ANS) crude to average $76/bl in fiscal 2015 and $66/bl in fiscal 2016, compared to $107.57/bl in fiscal 2014. Alaska ranks fourth in overall crude production in the US.
"Although, in the short-term, lower oil prices lead to lower revenues, our long-term view is optimistic. Greater investment by the oil and gas industry on the North Slope and solid performance of state investments makes Alaska's overall financial health sound," Department of Revenue acting commissioner Marcia Davis said.
Production impacts have already been seen in North Dakota, the second-largest oil-producer, where output fell from September to October, the first month-to-month drop since December 2013. North Dakota production in the Williston basin, which includes the Bakken formation, was 1.18mn b/d in October compared with 1.19mn b/d in September.
North Dakota expected to collect $6.8bn in oil taxes from 2013-2015 based on a $72-$74/bl oil price, but that figure may be lower now, said Office of Management and Budgetdirector Pam Sharp. The office currently forecasts $8.3bn to be collected in taxes from 2015-2017 based on a $74-$82/bl price, but will reevaluate its projections next year.
While oil taxes contribute "a lot of money" to the state, "North Dakota is still financially very strong," Sharp said.
Other major oil-producing states are less sure about where low oil prices will leave them. In top oil producer Texas, the Comptroller of Public Accounts said it is carefully monitoring the recent decline in oil prices.
"The likely impacts on revenues and/or the broader economy are uncertain because we don't yet know the effects of these lower prices on drilling or production or how long these lower prices might persist," the agency said in a statement.
The Texas legislature only meets every other year, with the next session to begin 13 January.