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Oil Price Implications on Texas Budget

"I don’t wanna hear a story in three months that we put oil in some cavern somewhere and it caused some type of pollution...This is an emergency after all,

-Wayne Christian, Texas Railroad Commission Chairman

Sales taxes and oil revenue have been the backbone of the Texas budget for decades.

The Texas Taxpayers and Research Association estimates that the state loses $85 million for each $1 drop in the price of oil. And as shown in a report released today by the Permian Basin Petroleum Association, the oil & gas industries paid $13.4 billion in taxes and royalties into Texas state coffers in the year preceding the pandemic. But with sales taxes dropping off and the price of West Texas oil crashing to negative prices on the futures market back in April, the Permian Basin, once the fracking capital of America, has been dethroned. Due to the crash, the title of fracking king has passed on to the Marcellus Shale in Pennsylvania.

In previous down economic cycles, the state has had to prioritize its spending, sometimes with very hard decisions and consequences. In 2011, the initial state budget drastically slashed spending on public education and health care to the point where services in these areas would have been severely limited for years. Luckily revenue estimates were increased and those areas of the budget faced only limited cuts.

This time, however, the state is facing the double impact of decreased sales taxes and historically low oil prices. It is clear why the state is pushing faster than some feel necessary to “reopen” the state’s economy following the COVID-19 outbreak. The health data available suggests that the COVID-19 outbreak has not had the severity in Texas as in other states, and lawmakers are hopeful that the warm Texas summer months will slow the outbreak even further. If reopening the state is successful and another wave of infections can be delayed until the winter months, the state may not be facing as dire of an economic situation as initially thought. However, the Governor has already started to triage the economic wounds by instructing all state agencies (with limited exceptions) to prepare for a round of 5% across the board budget cuts and prepare for an "economic shock".

But where will oil prices settle once the (hopefully) heaviest impact of COVID-19 finally passes? The US Energy Information Administration (EIA) recently updated its forecast for short-term and long-term oil prices:

  • Average price of $27.48/barrel for the last half of 2020

  • $43.31/barrel for 2021

  • $48.53/barrel by the end of 2021

As you can see, oil prices will continue to remain below $50/barrel for the foreseeable future. At these prices, oil producers will continue to face tough decisions regarding production numbers. With less production, comes fewer jobs throughout the entire Texas energy sector.

For the state budget, Oil excise taxes equal 4.6% of the market value of oil produced and 7.5% for gas production. In 2017 the state brought in more than $2 billion in oil excise taxes when prices for oil were over $50/barrel, with prices expected to be below this mark, budget writers will need to drastically decrease overall funding.

All of this, of course, assumes no more major shocks to production such as conflicts in major oil-producing countries, natural disasters, or continued lack of storage which led to the Railroad Commission agreeing to let oil producers put it all back in the ground. Environmental groups are concerned about leakage into aquifers, but as the Commission Chairman said above....this is an emergency after all...

EIA Oil price summary:

View the full EIA Forecast:

Other Quick Links:

Economists break down how the crash in oil prices will affect Texas:

The Texas Tribune analyzes how the oil crash will impact Texas’ budget:

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