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How the global oil collapse ripped a hole in US state budgets

REUTERS/Nick Oxford
Empty pipeline in the Permian Basin.
  • Michael J. Coren
By Michael J. Coren

Climate and emerging industries editor


Just a few months ago, states like New Mexico were talking about a huge budget surplus. Amid a 30-year oil boom, their treasuries grew by the billions as states collected fees on oil and gas extraction.

But when the pandemic sent global oil prices crashing, that revenue stream all but disappeared. Now, legislators are scrambling to close huge budget shortfalls in some of America’s western states.

As global oil consumption fell about 10% during pandemic-related shutdowns, Russia and Saudi Arabia flooded the world with oil, driving its price down. Prices for benchmark crude now seem stuck around $40 per barrel—which, perhaps not coincidentally, is low enough to deprive most US shale oil frackers of profits while keeping producers overseas afloat.

That’s driving many US frackers into bankruptcy. With oil prices below $55 per barrel, says energy economist and consultant Philip Verleger, “much of the private industry must shrink or vanish” in the US.

For western states that have hitched their budgets to the oil and gas industry, this is a fiscal nightmare. As extraction outfits shutter, low production and prices will cut off their fossil fuel revenue. And the immediate financial loss is being exacerbated by the federal government, as it executes a quiet bailout of the oil and gas industry.

In 2019, the US government collected $12 billion from fossil fuel companies that extracted on federal lands, and about a third of that went back to states. But on April 21, the US government began granting sweeping relief to oil and gas companies. It lowered royalties from 12.5% to as low as 0.5%, and extended lease periods for up to a year.

Federal disbursements to states have now plummeted by $1.4 billion this year, down 23% compared to the first half of 2019.

Critics say the steep royalty reductions are a “backdoor bailout” for the moribund shale oil industry. Because of their distributed nature, no one knows exactly how much support is being doled out. The non-profit Center for Western Priorities is tracking royalty relief over 360,000 acres of drilling sites, and an equal area of lease suspensions. It believes the Bureau of Land Management is significantly undercounting.

The most surprising data gap is across New Mexico in the heart of the Permian Basin, America’s most productive shale oil region. No royalty relief has been publicly reported across vast stretches of the state. “We know it’s incomplete by an order of magnitude,” says Aaron Weiss, a policy analyst at the Center for Western Priorities. “It’s a black hole.”

The New Mexico story

While some states said they support some royalty relief, an association of western governors wrote to the Department of Interior in April warning against a steep reduction in royalties without consultation. “These oil and gas royalties are an integral component of many western states’ budgets, and suspending their collection would have a direct negative effect on states,” the letter stated.

New Mexico is feeling that pain. It expected a $3.1 billion budget surplus this February from windfall profits in the Permian Basin, home to more than 60% of US oil and gas production. That convinced the state legislature to pass a $7.6 billion budget loaded with generous programs. Historically, about 40% of the state budget has been funded by oil and gas.

That all came crashing down with the price of crude in March. The number of active drilling rigs in New Mexico has fallen 59% since then, according to the state’s legislative finance committee (pdf). At least 12% of the state’s oil and gas wells are now shut-in, and some will never restart.

In June, facing a $2 billion budget shortfall, New Mexico passed an amended budget slashing the new educational spending, and drawing on a state rainy day funds and $750 million in federal dollars to plug the hole. Utah, Texas, and Wyoming face similar straits. Wyoming is preparing to cut 10% of the budget, or $250 million, but a $600 million shortfall awaits. There is now only one rig operating in the state, down from 33 in 2019.

A long, difficult road awaits many US oil state producers. Global oil consumption isn’t expected to return to 2018 levels until 2021—and after that, it may plateau or even decline. The coronavirus may force western states to finally reckon with budgets reliant on a boom-and-bust commodity that may never get another boom.

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