From the Santa Fe New Mexican

Every dollar change in WTI represents $9.5 million for the state budget—up or down

Welcome news for motorists may turn out to be bad for state government.

The price of oil is climbing back from its low point in early 2016, when rates plunged after a years-long boom, depleting the state’s finances and weakening the economies of oil patch communities. Still, with a global glut, some economists say oil prices won’t rise much higher anytime soon.

The relatively low cost of gasoline is a relief for drivers heading out on summer road trips. But it is cause for concern among legislators who are counting on oil prices rising as the state tries to rebound from a budget crisis that has led to cuts in education and other government services.

New Mexico’s budget is still tight, with little money in reserves to cushion against a drop in oil revenue.

“We don’t have much of a margin for error,” said Jim Peach, an economist at New Mexico State University.

The state’s budget for the fiscal year that begins in July relies on oil selling for an average of $48 a barrel. West Texas Intermediate crude was about $43 a barrel Friday, ticking up by a few cents after sliding from around $50 a month ago. And when factoring in the costs of shipping it to market, oil produced in New Mexico tends to sell for a few dollars less than that benchmark price.

If prices remain in the low $40s for a few months, the state could face another financial crunch, Peach said.

New Mexico remains heavily reliant on oil and gas production to prop up its budget. A dollar increase in the per-barrel price of oil generally translates into $9.5 million for the state’s general fund. And depending on other economic factors, revenue from oil and gas can account for 15 percent to 25 percent of the state’s annual budget, according to a 2016 report by the Legislative Finance Committee.

David Abbey, the committee’s director, told lawmakers last week that a boost in other revenue could partly make up for lower oil prices. Revenue from gross receipts taxes is increasing, for example.

But, he added, “we’re worried about an oil production glut that has clobbered us in the last year.”

State analysts’ expectation that oil will sell for about $48 a barrel during the next year is based on data from December. Abbey told legislators that if analysts were forecasting the price again, they would probably expect less than $48 a barrel.

Some economists believe these relatively low prices could be here to stay.

Even though the supply of oil is already high, some countries continue to churn out growing quantities of crude, and demand does not seem to be rising very quickly, Peach said.

To boost prices, the Organization of Petroleum Exporting Countries has sought to cut production among its members, which include many of the world’s oil-pumping powerhouses. But some countries, such as Libya and Nigeria, are increasing production after slumps. And ongoing production in the United States also has undercut the cartel’s efforts to drive up prices.

Oil production in the United States has been climbing since September. New Mexico by March was churning out as much oil as it was when production in the state peaked during 2015, pumping more than 13 million barrels of crude on a monthly basis.

With new drilling techniques such as hydraulic fracturing and horizontal drilling, producers in the Permian Basin along New Mexico’s southeast border with Texas have been able to extract oil in areas that were once unreachable and at a relatively low price.

Economists say some producers in the area can keep turning a profit even if oil prices drop to $40 a barrel.

Major oil producers, from Chevron to Hess and Marathon, have poured into the area.

“I wish I had a better word for it, but the Permian is just hot right now,” said Robert McEntyre, a spokesman for the New Mexico Oil and Gas Association.

The industry’s own success in extracting more oil for less money underscores why production may continue chugging.

“All of the indicators are that we’re not going to $60 a barrel anytime soon,” Peach said. “If I had to bet, I’d bet on somewhere in the $40-45 range for several months.”

Analysts at Bank of America Merrill Lynch and the firm FGE have recently suggested the price of oil could fall as low as $30 a barrel.

Jeff Mitchell, director of the Bureau of Business and Economic Research at The University of New Mexico, said focusing on the day-to-day shifts in the price of oil misses the more important point that the state’s financial outlook remains closely tied to a commodity that is out of its control.

Policymakers have called for years to diversify New Mexico’s economy but with little success.

“Only when you’re so dependent on something are you so nervous about dollar changes,” Mitchell said. “That’s the problem.”


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