Just when things were looking great with respect to oil and gas royalties to finance state government, BAM the corona virus hits, a global oil price war intensifies, and New Mexico gets hit in the process, all within one month since the adjournment of the New Mexico legislature on February 20. . The global oil price war has hit hard the state’s revenue boom, harder than anyone expected. It has caused the state budget surplus to evaporate. The New Mexico Legislature’s finance analysts had pegged oil prices for the budget year that ends in June to an average $52 per barrel with oil prices per barrel of crude now hitting $21.
On February 20, the New Mexico legislature ended having enacted a $7.6 Billion dollar budget for the 2020-2021 fiscal year. The enacted budget raised annual spending by $536 million, or by nearly 8% over last year’s budget. The increase in spending was a result of record-breaking oil production in the Permian Basin with the state originally anticipating at least an $800 million increase in state government income during the coming budget year. The legislature also enacted a separate $49.5 million in capital outlay projects. Oil and natural gas represent 39% of New Mexico’s General Fund revenues. The 2020-2021 fiscal year begins July 1.
Passage of the $7.6 billion budget plan for the 2021 budget year was predicated on oil averaging $52 per barrel. The price of crude oil per barrel has now plummeted to an alarming $20 dollars a barrel and is expected to go down even further. With each $1 drop a barrel in oil prices, the state loses upwards of $22 million in direct oil and gas revenue over a full year. Within one month of adjournment of the New Mexico legislature, the corona virus hit the country and hit New Mexico, but the oil price war between Russia and the Organization of Petroleum Exports (OPEC) has hit the state coffers even harder. The biggest fear is that oil prices will drop to single digits.
NEW MEXICO’S RELIANCE ON OIL AND GAS REVENUES
A report by the New Mexico Tax Research Institute released in January, 2020, revealed that the oil and natural gas industry contributed more than $3.1 billion in tax revenue for fiscal year 2019, a dramatic 41% from the $2.2 billion generated the year before. The $3.1 billion was an increase of $910 million from 2018. Oil and natural gas represent 39% of New Mexico’s General Fund revenues, the highest share of all industries in recent history.
The New Mexico oil industry’s historic energy production was enabling unprecedented investment by Mew Mexico in education. In FY 2019, the oil and gas industry contributed $1.36 billion to public education, representing a 28% increase over FY 2018. New Mexico’s highest producing oil and gas counties were Lea and Eddy County. The counties received a combined $90.2 million for K-12 and higher education programs.
While the majority of production takes place in the Southeast and Northwest quadrants of the state, benefits from the oil and natural gas industry were felt statewide. Bernalillo, Santa Fe, Sandoval, and Valencia counties obtained the most education funding, receiving a combined $624 million, according to the report. Not surprising the two largest populated counties received the most in funding. Bernalillo County was the top recipient with $435.9 million, followed by Doña Ana County with $195.2 million.
Public schools and higher education received $1.36 billion from state oil and gas revenue in FY 2019, up a staggering $300 million from FY 2018. It includes upwards of $1.06 billion for primary and secondary education, and $302 million for state universities, colleges and other higher education institutions.
OIL PRICE WAR RESULTING IN GLUT IMPACTING STATE
In 2017, an oil production agreement was entered into between Russia and the OPEC countries. The agreement suppressed world production approaching 2 million barrels of crude oil a day. The suppressed oil production output lead to very stable oil prices of $50 to $60 a barrel of crude oil. The Russia – OPEC agreement expires on March 31, and the oil producers are expected to ramp up production that will flood the global markets with unprecedented levels of supply. A price war will ensue as the oil producers battle it out to see who will last the longest and gain most market share amid low prices.
The Russia and OPEC price war has sent Brent crude, the global benchmark, below $30 a barrel and prompted energy companies including Exxon Mobil Corp. to plan for big spending cuts. Russia and OPEC are boosting their exports just as global oil demand suffers an historic contraction due to the coronavirus pandemic. On March 17 Goldman Sachs Group Inc. the rate of petroleum consumption was dropping by about 8 million barrels a day, or about 8% of global demand.
With the price war showing no sign of abating and demand falling, Wall Street is slashing its oil forecasts. Goldman is now predicting that the average will be $20 a barrel during the second quarter. Oil traders privately say the benchmark could even drop into the single digits to force some producers to shut down their wells. That’s something that hasn’t happened since the industry downturn of 1997 to 1999.
No one knows for certain how long the economic shutdown from coronavirus will last, it could be weeks, months and perhaps even more. Additionally, no one knows for certain how long the price war between Russia and OPEC Countries will continue. The two events combined have pushed the price of U.S. benchmark West Texas Intermediate to $20.06 a barrel as of March 19, the lowest price per barrel of crude oil since 1998.
With the expected April surge in world oil production looming as a result of the Russia and OPEC price war, Exxon said that it’s reassessing its previously announced spending cuts. Major oil companies like Exxon-Mobil and Occidental Petroleum have announced immediate investment cuts ranging from 20% to 40% as a result of the plummeting oil prices.
Occidental has announced it will cut spending by 32%. Exxon Oil has said it will lower its global investments from $30 billion to $35 billion. It’s the Exxon cuts that will have the most impact on New Mexico’s oil royalty’s revenue stream. Exxon has already announced it plans to reduce operating rigs by 20% in Permian Basin from southwestern Texas northward into the New Mexico counties of Lea and Eddy counties.
The 20% decline represents upwards of 4 million barrels a day now produced in the Permian. As the crisis continues, further production oil production will drop in New Mexico impacting the state major revenue source. New Mexico recently reached a historic high of 117 operating rigs despite the current prices no doubt as the result of the delay in the crisis taking a strangle hold of the industry. But that is about to change dramatically.
Daniel Fine, an energy researcher with New Mexico Tech in Socorro, in an interview with the Albuquerque Journal, said the situation is dire for the Permian Basin in West Texas and southeastern New Mexico, and for the northwestern San Juan Basin in the Four Corners region. Fine projects the total rig count for oil production in New Mexico will drop to between 50 and 60 in the coming weeks resulting in between 2,300 and 2,700 lost jobs, reflecting layoffs of 40 workers per oil rig.
According to Fine:
“The damage from this crisis will be greater and last longer than the last industry downturn in 2014-2016. Production in the Permian Basin will have to decline by at least 600,000 to 700,000 barrels of oil per day or more before the situation gets any better.”
COMMENTARY AND ANALYSIS
It is clear that the corona virus is a very infectious disease that is spreading like a wild fire throughput the world, the United States and now New Mexico. What is happening in the world, country and state are indeed historical in every sense of the word and cannot be downplayed. When it comes to New Mexico, the corona virus is short term compared to the effects of the oil price war on New Mexico’s economy and far more damaging on so many levels.
State officials and oil industry leaders are hoping a modest rebound in oil prices heading into summer as the corona virus contagion slows and businesses and consumer demand bounce back. For now, when it comes to New Mexico’s budget, the worst needs to be prepared for as actually happening and there is no doubt that Governor Lujan Grisham is facing a major financial and government budget crisis. In times of crisis, drastic measures at times must be taken. Convening a special session, repealing the 2020-2021 budget and going to a “zero growth budget” are such drastic measures, but indeed must be done.
Governor Lujan Grisham needs to go forwards with a special session sooner rather than later. A special session needs to be convened before the enacted budget goes into effect on July 1. Such a special session should not last more than 1 or 2 days predicated on a new budget being hammered out and agreed to before the session is called by the Governor.
For a related bog see: