Fitch: US Energy States will Be Pressured by Oil Production Cuts

Persistent commodity price declines have slowed some states' economic growth rates. Based on current price and production cut forecasts, Fitch Ratings expects these negative budget pressures will continue into 2016. Low oil and gas prices, mining declines, and subsequent declines in taxes generated from those business activities are likely to challenge states including Alaska, North Dakota, and Wyoming. States with more diverse economies and revenue resources should be able to weather prolonged commodity price declines more effectively.

At one third of the way through many states' fiscal years, oil and natural gas prices are well below many state budget estimates. A rally in prices in oil late August has eased as crudes stocks have risen. Natural gas prices are also below many state forecasts. This week the Nymex contract for November delivery fell to $1.997 per mBtu. This was only the fourth time contracts have gone below $2 per mBtu since 1999.

The declines in the prices are likely to be accompanied by production cutbacks that will also push down revenues. The current U.S. Energy Information Administration (EIA) forecast sees the crude oil production declines continuing through August 2016.

These declines may put pressure on other revenue types. Sales and personal income taxes are the most likely to take a hit. For example, the Texas comptroller recently noted that state sales tax revenue in August 2015 was down just 0.4% year on year due to reduced receipts from the oil and gas-related sectors.

Many states have long track records of offsetting commodity-based declines with other budget facilities. Many maintain reserves to offset losses of operating revenue. Some benefit from significant economic diversity and losses in oil revenue will likely be offset by boosts in consumer-driven tax revenue as in California, Colorado, and Texas.

However, some of these offsets would lose their power if an extended slump in commodity markets continues into fiscal 2017. In that case, we would expect energy states to identify fiscally prudent strategies to address persistently low revenue scenarios.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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