The U.S. has its own ‘oil curse’

The U.S. has its own ‘oil curse’
The term “oil curse” — coined to describe petro-rich developing countries where the “black gold” came with the heavy price of economic and political instability — is now being adapted for use in the U.S., where “petrostates” and cities are seeing shrinking tax revenues, budget deficits, negative credit ratings, rising unemployment and even outright recession as oil prices have fallen.Alaska, North Dakota, Wyoming, New Mexico, Louisiana, Oklahoma, and Texas, which enjoyed the feast of the shale revolution, are now threatened with famine. How they weather the storm, analysts now say, could largely determine their fiscal and economic fortunes for the next decade.In Alaska, poster child of oil-dependent states, lawmakers spent two contentious summer legislative sessions debating how to cover a $4 billion budget deficit. They weren’t alone: Plunging oil prices have drilled holes into state budgets — $2 billion in Louisiana, $1.3 billion in Oklahoma, $1.3 billion in North Dakota — that left lawmakers bickering over how to close the gaps.“We spend about $1 billion per year on our schools,” Pat Pitney, director of Alaska’s Office of Management and Budget, said in an interview with MarketWatch. “We could close every school in the state and that still wouldn’t be enough to close the budget gap.”Tumbling tax revenueOil prices dropped a whopping 46% in 2014, then another 31% in 2015. They bottomed in February 2016 at $27.45 per barrel, and while they have since recovered to around $50 a barrel, they are still down 60% from 2014 highs.These declines have caused a huge revenue gap for states that rely on so-called severance taxes to fund operations.Severance taxes are imposed on companies that remove nonrenewable resources, such as crude oil and natural gas, from the ground. As oil prices plunged, they declined nationwide up to 50% in the last year, Moody’s said in September. And severance taxes fell 46% from 2014 to 2015, according to the U.S. Census Bureau.As state legislatures have struggled to cover oil-fueled deficits, credit-ratings firms have issued a flurry of rating cuts. Standard & Poor’s in January downgraded Alaska’s credit rating to AA+ from AAA, while Moody’s has revised several states’ outlook to negative — North Dakota in March, Kansas in May and Oklahoma in June.Some states’ unemployment numbers have crept higher, suggesting that the problem is rippling through their economies.Between February 2015 and June 2016, Wyoming’s jobless rate grew by almost two whole percentage points to 5.6% from 3.8%. The problem was more pronounced in certain oil-reliant counties and cities: In Lafayette, La., the jobless rate jumped to 6.1% in May, while in Kern County, Calif., it skyrocketed to 9.6%, nearly double the national unemployment rate.States rely on severance taxes to varying degrees — the highest being in Alaska, where they represent 72% of total state taxes, according to federal government data. That poses a sustainability conundrum for the state, said Pitney, as the state is over-reliant on a volatile revenue source.Alaska depends on energy taxes for nearly 90% of its general fund revenue, which pays for things like schools, roads and public workers. As oil prices have tumbled, Pitney says, Alaska’s total general-fund annual revenue fell 84% from its 2007-2013 average.To diversify revenues, Gov. Bill Walker in April proposed an overhaul that would impose an income tax and schedule structured annual draws from Alaska’s Permanent Fund Earnings Reserve, which pays for the yearly dividend most Alaskans receive.Drawing from the PFER would mean state revenue would become more reliant on broader financial market performance than just oil prices, Pitney said. But it would also mean reducing the dividends the state pays citizens, an unpopular measure.The state legislature’s special session ended on July 18 without a fiscal overhaul. Walker vetoed some spending, narrowing the $4 billion deficit by $800 million and leaving the remaining $3.2 billion to be covered from the rainy day fund, known as the Constitutional Budget Reserve Fund, according to the state’s OMB.Alaska now resembles an individual with a fat bank account but no current earnings, according to Pitney. At some point, the capacity to draw from savings will be depleted: The OMB projects that the rainy day fund will be depleted in the next fiscal year, Pitney said.That can only be avoided if oil returns to $100 per barrel, according to Moody’s — an unlikely scenario, according to commodity-market analysts, pointing to more fierce battles in state legislatures over revenue and spending options.When the oil crisis turns into a recessionA reliance on oil revenue doesn’t mean a state is in fiscal danger as soon as prices fall, experts say. The trouble, according to Ty Schoback, a municipal bond analyst at Columbia Threadneedle Investments, is that most oil-dependent states “do not have deep diversity of economic background.”In those cases, every aspect of the economy is tied to the energy industry — so capital-spending cuts in energy companies ripple throughout the economy.In Wyoming, mining is the state’s largest industry, accounting for 32% of the state’s gross domestic product, according to Moody’s. In Louisiana, chemical and petroleum exports are about half of the state’s exports.In three states — North Dakota, Wyoming and Oklahoma — Moody’s analysts found that as oil tumbled, non-energy taxes were also missing collection targets. All three states ranked among the four worst performers in the U.S. in terms of sales and income taxes in fiscal year 2016.The problem trickles down to cities. “Energy hubs” are seeing tumbling sales-tax collections. As the following chart shows, the higher the reliance on oil-and-gas employment, the steeper the sales-tax drop.“When people think ‘oil state’ they immediately think Texas,” said Schoback. “But Texas actually has the most tools to soften the blow.”That’s because Texas’ economy is diversified, with only about 11% of the state’s tax revenue coming from severance taxes, according to the Dallas Fed. And while California is the third-largest oil producer in the U.S., oil and gas is a very small portion of the state’s economy. Low oil and gas prices have a negligible impact on the state’s budget.But in Oklahoma, Alaska, Kansas and Wyoming, the lack of diversification — along with decades-old structural problems, including high levels of debt and unfunded public pensions, have resulted in recession, according to an August Loop Capital report.Oklahoma in particular has been in a recession for the past year, as measured by a decline in state GDP for the past four consecutive quarters, according to Loop Capital.Government revenues have fallen for 17 straight months — longer than the economic contraction during the Great Recession — while industry employment is down 30% from its pre-downturn peak. The state’s unemployment rate, meanwhile, climbed to 5.3% in June 2016. (In May, it surpassed the national average for the fi…

Be the first to comment on "The U.S. has its own ‘oil curse’"

Leave a comment

Your email address will not be published.