Oil & Gas News

Oil price slide could slam Oklahoma government funding

By: Jack Money The OklahomanPandemic fears and a global energy war are poised to wreak havoc on Oklahoma’s oil and gas industry and in turn could cripple one of the state’s largest revenue streams.

A lasting, dramatic price drop would have long-term effects on every individual in Oklahoma, as gross production taxes collected on oil help pay for bridge rehabilitation, water infrastructure, higher education and tourism, among other things. Over the weekend, the price for West Texas Intermediate crude oil dropped more than 32%. The price per barrel was $45.82 as markets closed Friday, but decreased to $30.96 per barrel by Monday’s markets close.

The drop is due to several global factors including a general weakening in demand, and exacerbated by coronavirus-related demand drops in China as well as last week’s collapse of the OPEC-Russia alliance.

Historical impact

The oil and gas industry has always been closely intertwined with Oklahoma’s broader economy. Virtually all state tax revenue is sensitive to fluctuations in the price of oil, including the state income tax. A production slowdown in the oil field can trigger drastic budget cuts at the state Capitol.

The gross production tax is collected on the value of produced oil and natural gas from Oklahoma wells. Because value matters, a significant decline in price hits the state’s budgeting bottom line.

Oklahoma collected over $1.1 billion in tax revenue from the production of oil and gas during the 2019 budget year. About 65% of that money was placed in the state’s general fund for lawmakers to spend how they see fit. On top of that, more than $200 million was earmarked for county road repairs and local school district funding.

As the price of oil fell from record highs in the middle of the last decade, state officials scrambled year after year to handle budget shortfalls. They often turned to spending cuts, but those decisions stirred political unrest and led to a months-long budget standoff in 2017. The ripple effect sparked protests at the Capitol, and is partly to blame for the 2018 teacher walkout.

What happens now

Oklahoma State Treasurer Randy McDaniel expects the effects of this price drop will arrive in waves. He noted last week the state has seen a six-month run of declining revenues from the gross production tax.

Collections on December production were off almost 20%, year-over-year, he noted. Decreases in other areas are also noticeable when oil and gas activity slows down.

Sales tax collections were down by 3.4% year-over-year in February, while motor vehicle tax collections also fell.

While income tax collections from individuals and corporations rose, that likely could reverse itself, too, if additional layoffs in the energy industry occur.

The difficulty for both operators and state leaders is there are no clear answers on how long low crude prices will persist or how bad they will get, McDaniel said Monday.

This could cause budgeting issues as Oklahoma’s governor and Legislature work to develop the state’s 2021 fiscal year budget, which starts July 1 and is heavily dependent on oil revenues.

He did say officials should be thankful for about $1 billion available in Oklahoma’s Rainy Day and stabilization funds.

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