Maggie McGrath (Forbes Staff)
Posted: January 21, 2016
Over the past few weeks, oil prices have gone into somewhat of a free fall, hitting twelve-year lows while throwing global markets into flux. Investor returns have been the most obvious victim of the turmoil, but those aren’t the only thing feeling the pain from oil’s bust. According to a new report from credit rating agency Standard & Poor’s, there are a handful of states whose budgets are taking huge hit from oil’s dip.
In a note titled “Collapsing Oil Prices Seep Into State Credit Profiles,” S&P credit analyst Gabriel Petek writes that bottoming oil prices are wreaking havoc on states like Alaska, Louisiana, North Dakota and Wyoming — i.e, places that derive hefty percentages of revenue from oil-related activities.
“The more aggressive a state was with regard to its assumptions and use of oil-related revenues during the oil boom, the more acute its fiscal pressure now, in the oil price bust,” Petek writes. “For states with greater budgetary reliance on oil-related revenue, the unrelenting decline in prices places a larger burden on state lawmakers to identify and enact corrective fiscal measures.”
What’s more, he says, short of a surprise drop in oil supply it’s unlikely that prices will sharply rebound anytime soon — meaning that relief is not exactly imminent.
What does this mean in real dollars? Here’s a look at four oil-dependent states with budgets that are starting to feel especially acute pressure:
Alaska: For much of the past 40 years, Petek explains, taxes and royalties from oil production have been sufficient to pay the majority of Alaska’s expenses. But now, with oil prices plunging, the state has had to depend on transfers from its budget reserves in order to plug the gap between its expenses and its revenue — yet those reserves won’t fully cover what the state needs to spend. “Despite comparatively large reserves, we do not view the arrangement as sustainable considering that the state’s unrestricted general fund faces a budget deficit equal to roughly two-thirds of baseline expenditures,” Petek says. Alaskan governor Bill Walker has proposed redesigning the state’s finances in order to narrow that deficit, but the plan he has put forth would be both politically unpopular (it would involve higher taxes and spending cuts) and financially ineffective. According to S&P’s analysis, there would still be a $427 million gap after Walker’s measures, a sum equivalent of 9% of Alaska’s projected expenditures in 2017.
“Absent a course correction,”says Petek, “we believe the state’s present fiscal trajectory points to potentially weaker credit quality.”
Louisiana: Oil and gas- related revenue accounted for 12% of Louisiana’s revenue in fiscal 2015; this year, it will account for just 8%. Though the state benefits from offshore drilling — which is “less less sensitive to short-term drops in oil prices than that of shale plays,” according to Petek — the combination of plummeting oil prices and ongoing budget imbalances portend financial trouble for the Bayou State. Budget forecasts released over the past two months have projected a more-than $1 billion shortfall in fiscal 2016 and a nearly $2 billion shortfall in fiscal 2017.
North Dakota: Unsurprisingly, the state whose recent fortunes have benefited so greatly from the fracking boom also has exposure to the downturn in oil prices. But because North Dakota depends less on oil taxes and more on sales taxes and other revenue that has resulted from the flood of workers coming into the state to develop shale fields, the financial hit hasn’t been quite as large as it is elsewhere. S&P notes that for the first five months of the 2015-2017 biennium, North Dakota’s general fund tax revenue was 8.9% below budget, thanks largely to a 26.5% decline in sales tax revenues. The state is currently waiting on a new 2016 budget forecast; if the revenue shortfalls exceed $105 million, North Dakota could find itself tapping its $572 million budget stabilization fund.
Wyoming: Wyoming already lowered its revenue forecast thanks to falling oil, gas and coal prices. But it released that forecast on January 14 using data from January 5 — so by the time of the forecast’s release, oil prices had dropped 18%. The good news for the state is that oil is not its primary revenue driver. Coal comprises 41% of Wyoming’s severance taxes; natural gas comprises 29%; and oil comprises 26%.