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. Within one month of adjournment of the New Mexico legislature, the corona virus hit the country and hit New Mexico. Within two months after the New Mexico Legislative session ended the oil price war between Russia and the Organization of Petroleum Exports (OPEC) hit the state coffers harder. The result is that the 2020 budget enacted by the New Mexico legislature has been blown apart and the state is faced with a projected $2.5 Billion dollar deficit.
The price of crude oil per barrel had plummeted to an alarming $21 dollars a barrel and as of April 9, rebounded to $31.48 a barrel. 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. Governor Lujan Grisham has announced that she intends to convene a special session to hammer out and enact a new budget that begins on July 1, 2020.
OIL PRODUCTION AND PRICE WAR
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 expired on March 31, and the oil producers as expected increased oil production that flooded the global markets with unprecedented levels of supply.
The Russia and OPEC price war sent Brent crude, the global benchmark, $20 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. The price of oil has rebounded and as of April 9, it was $31.48 a barrel.
“TENTATIVE” AGREEMENT REACHED BETWEEN OPEC AND RUSSIA
On April 9, it was announced that Organization of Petroleum Exporting Countries (OPEC) and Russia are negotiating agreements for major cuts in global output that will raise the price of oil. OPEC and Russia agreed in principle to collectively cut oil production by at least 10 million barrels per day. They also agreed to seek a 5-million-barrel daily production from the United States. If successful, the 15 million barrel per day reduction will be the biggest oil reduction in history. Worldwide consumption has fallen upwards of 65 million barrels of oil a day. The oil production is down from 100 million before the corona virus began and engulfed the world.
What is dicey at best is that OPEC and Russia want the United State government to impose state-mandated cuts in oil production and not the let the market force producers to scale back operations through low prices. The problem is that in the United States, demand for oil has fallen 30% to 14.4 million barrels a day which is the lowest level since 1990. US domestic gasoline consumption has also reached a 52-year low.
On April 10, OPEC and Russia will seek the five million barrel reduction in additional cuts from the U.S. and Canada and all the 20 nations comprising the G-20 energy ministers. When the the proposed deal emerged ahead of the meeting of oil ministers, the market’s reaction was negative and oil prices fell sharply after the details of the agreement emerged. An Opec official said talks to ratify the deal to cut 10 million barrels a day of production, or roughly 10% of global supply, would continue at the meeting of G20 energy ministers on Friday, April 10.
Global benchmark Brent crude oil reversed a near 11% rally to close down 4% at $31.48 a barrel on Thursday, April 9 as traders doubted the cuts would make up for the fall in demand resulting from the corona virus outbreak and questioned whether the non-Opec producers would contribute.
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 bounces back. For now, when it comes to New Mexico’s budget, the worst needs to be prepared for as actually happening. With a projected $2.5 Billion shortfall, there is no doubt that the NM Legislature and Governor Lujan Grisham are 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.