Lower oil prices wreak havoc on state budgets

December 31, 2014 | 0 Comments

This New Year’s Eve, motorists can celebrate at the pump, where the price of gas has, as of this writing, a national average of $2.273 per gallon, according to the AAA. In fact, except for Vermont, Alaska, and Hawaii, all states saw the average price of gas drop at least a dollar between June and December. Some states are even seeing prices lower than $2 per gallon.

Gas prices are still dropping thanks to the fracking revolution. Image from Mattymatt.

Gas prices are still dropping thanks to the fracking revolution and OPEC production that’s as high as ever. Image from Mattymatt.

The reduction can be traced to the worldwide decline in the price of crude oil, which began plummeting in June. Oil producers have been “swelling supplies,” John Kilduff, founding partner of New York-based Again Capital, which invests in energy, told the Wall Street Journal. Indeed, U.S. oil production is the highest it’s been in more than three decades, but demand hasn’t kept pace with supply.

“It’s going to continue to grind lower until somebody blinks,” Kilduff continued. Translation: No one knows when oil prices will start to climb.

In the meantime, state budgets that lean heavily on oil and gas taxes are feeling the pinch. For instance, Alaska, which relies on oil to fund 90% of its government (residents there pay no state income or sales taxes), has had its credit forecast downgraded from stable to negative by Moody’s, the credit rating service, as its budget deficit has grown. Continued economic woes could halve the state’s capital spending for bridges and roads.

Texas has similar issues, despite a measure meant to flood its transportation agency with money. In November, voters passed Proposition 1, which proposed using excess oil and gas production taxes to bridge the $5 billion yearly budget gap for the Texas Department of Transportation.

But production taxes are pinned to oil prices. When the cost of oil drops, so do tax revenues. That means that the long-term transportation-funding gap that Texas policymakers forecasted for next year’s legislative session may be even larger than expected.

They’ll find out on January 12, when newly elected state comptroller Glenn Hegar is scheduled to tell lawmakers the expected health of the Texas economy for the next two years and how it will affect state revenue. If the numbers are too low, sectors like transportation and education will be subject to heedless budgetary restrictions. If they’re too high, state agencies will scramble to make spending cuts months from now. Fortunately, the Texas economy is more diversified than during previous oil and energy busts, like those in the 1980s and early 1990s, so it isn’t as vulnerable.

Not so for Louisiana, which has a smaller economy. Although the portion of its budget that’s tied to oil and gas is smaller than in years past — 13% today versus 45% in the 1980s — the percentage is still significant enough to have raised the state’s budget shortfall for 2015-16 to $1.4 billion. Belt-tightening measures have already been taken, with Governor Bobby Jindal announcing last month spending cuts to road maintenance and public school testing. Another round of restrictions is expected in January.

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