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Lou Cannon: Oil Price Collapse Pressures State Budgets

The collapse of oil prices is taking a toll on energy-producing states. As job losses mount in the nation’s oil patch, depressed oil and commodity prices are having a ripple effect on state budgets.

As many as a dozen states have been affected by the energy-price downturn, said Scott Pattison, executive director and CEO of the National Governors Association.

In North Dakota, Republican Gov. Jack Dalrymple has ordered cuts to close a $1 billion budget gap. In Alaska, independent Gov. Bill Walker has proposed that the state adopt an income tax.

Oklahoma is making across-the-board spending cuts and New Mexico is reducing spending on higher education and other items as these states struggle to balance their budget.

Alaska, Louisiana and New Mexico risk lowered credit ratings, according to Standard & Poor’s rating services. In Texas, state revenues from oil and natural gas fell 48 percent in the first four months of fiscal 2016.

The situation in these states reflects a global predicament. As The Economist puts it: “The world is drowning in oil.”

The British publication enumerated reasons for the glut: Full-tilt oil production in Saudi Arabia, which seeks a competitive edge over the United States and political advantage over Iran and Russia. The lifting of economic sanctions against Iran, which has pushed millions of additional barrels oil onto the market. Weak growth in China that has reduced demand.

It could get even worse.

Figures published early this month revealed that Russia, one of the world’s largest oil producers, pumped at record levels for the post-Soviet Union era in January. According to The Daily Telegraph in London, Russia produced 10.88 million barrels a day last month, an increase of around 80,000 barrels from December.

U.S. producers have also contributed to the glut. U.S. shale farms cut more than 400,000 barrels a day from their output in response to falling prices but still increased oil production more than any other country in 2015.

Economists around the globe were enthusiastic in 2014 when oil prices began their descent to their present level of $30 a barrel from $110. In the conventional view, cheap oil meant global growth, lower gasoline prices at the pump and more money in the pockets of consumers.

Economists at JP Morgan Chase forecast last January that the oil-price slump would add 0.7 percent to U.S. growth in 2015.

By and large, these expectations came up short. Although nations lacking energy resources, such as India, benefited from reduced oil prices, overall global growth did not materialize.

Some oil-producing nations such as Venezuela and Nigeria have been politically destabilized by the price collapse.

Lower oil and gas prices have cost the jobs of about 100,000 workers in the United States and 250,000 worldwide. As many as 150 U.S. oil and gas companies could file for bankruptcy if oil prices remain at their present level, according to IHS, an energy research firm.

Instead of the surge predicted by the JPMorgan Chase economists, cheap oil shaved an estimated 0.3 percent off U.S. economic growth in 2015.

One reason for the discrepancy between the prediction and the result is that wary consumers have saved instead of spent much of the extra cash provided by reduced gasoline prices. Increased savings may benefit these consumers in the long run, but it has taken a bite out of current growth and caused stock markets to tumble.

The impact on the budgets of oil-producing U.S. states has been uneven.

Alaska, where the state government relies most heavily on oil and gas severance taxes, is reeling. So is Louisiana, where reduced energy income accounts for nearly half of the Pelican State’s $900 million budget shortfall.

But Texas, the nation’s largest oil producer, has effectively managed its budgetary issues because the Lone Star State has diverse tax sources.

Diversity is the key, Pattison said.

“Four decades ago, for instance, this situation would have been devastating to Colorado, which depended on taxes from mining and oil,” he said. “But state revenues in Colorado are now so diverse, that the oil fallout is barely a blip.”

Officials in the affected states have scrambled because their budgets were based on the assumption that severance taxes would be levied on oil priced at $48 to $49 a barrel. Oil hasn’t been near that level for months and isn’t likely to bounce back soon.

The current consensus is that low prices could persist well into 2017 because of continued substantial production and bulging inventories.

But low prices won’t last forever. Some of the experts on a panel assembled by Politico magazine warned against ignoring lessons of the past.

“We have been there before,” said Gal Luft, co-director of the Institute for the Analysis of Global Security.

He observed that the global response to the oil crises of the late 1970s was to increase production and enhance energy efficiency, causing prices to fall.

“The party didn’t last for long,” Luft said. “Between 1998 and 2008, oil prices rose seven-fold, triggering the Great Recession.  This might happen again if the global economy snaps back from its stagnation.”

Seeking upsides to the oil price collapse, Thomas McNulty of Navigant Capital Advisors, a consultancy, told CNBC that the “silver lining” of the present crunch for oil companies was the rapidity with which they moved to cut costs and build efficiencies. 

Although the number of drilling rigs used in the United States has dropped by more than 60 percent, many shale oil operators are still producing. Shell chief financial officer Simon Henry said that because of the high cost of mothballing wells it is sometimes more expensive to stop production than to keep pumping at low prices.

One positive global impact of cheap oil is that it has reduced the price of natural gas, crowding out coal, a dirtier fuel.

Nonetheless, there is concern that $30-a-barrel oil threatens alternative-energy development. Solar energy stocks have fallen in tandem with oil prices.

David Livingston, an associate with the Energy and Climate Program at the Carnegie Endowment for International Peace, said that cheap oil makes transition away from a fossil fuel–based economy longer and harder.

“The risk of missing climate goals rises,” he said.

Not everyone shares this view.

Daniel Esty, a Yale University professor of environmental policy, told Politico that a short-term drop in fossil fuel costs could over time strengthen the prospects for alternative energy.

“If the developers of wind, solar and other alternative energy projects are forced to cut costs, their technologies will be more cost-competitive over time,” Esty said.

There are other reasons for optimism. Largely overlooked in the concern about the deleterious effects of cheap oil is that the United States has finally achieved a long-sought goal of energy independence.

This accomplishment provides scant current comfort to laid-off oil workers, hard-pressed state officials or investors but could be crucial to national survival should a future crisis interrupt the delivery of oil from the Middle East.

Another boost could come from a provision in the omnibus tax bill passed by a Republican Congress last December and reluctantly accepted by the Obama administration, which had previously opposed it.

This provision removed a 40-year ban on exporting U.S. oil. Ending the ban has little impact now but could prove a boon to the oil patch once prices rise again.

There are benefits as well as harm from cheap oil.

Lou Cannon, a Summerland resident, is a longtime national political writer and acclaimed presidential biographer. His most recent book — co-authored with his son, Carl — is Reagan’s Disciple: George W. Bush’s Troubled Quest for a Presidential Legacy. Cannon also is an editorial adviser to State Net Capitol Journal, which published this column originally. Click here to read previous columns. The opinions expressed are his own.

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