The world’s major oil exporters — including Nigeria, Venezuela, Saudi Arabia, Iraq and others — routinely suffer when oil prices drop. These countries have struggled to diversify their economies enough to easily weather a down cycle and have been digging deep into financial reserves and cutting spending to make up the difference.
But the United States has its own petro-states and petro-towns, places whose fortunes can wax and wane with the health of the oil market.
On Wednesday, Moody’s Investor Service issued a report on the blow suffered by many places that once enjoyed a boom in shale oil and shale gas. Low oil and gas prices have directly lowered tax revenues in many states, and have also led to a drop in drilling activity and related services that has indirectly hurt state and local finances.
In Alaska, revenues from energy taxes made up almost 90 percent of general fund revenues when prices were high, Moody’s said. This year, they are projected to make up just 60 percent and the government has a $3.6 billion hole in its budget. And Alaska has had to deal with more than falling oil prices; output is falling too. Annual deficits of $3 billion or more are projected at least through 2019. The state government expects to drain its $10 billion reserve fund in fiscal 2018 and the governor, Bill Walker, has proposed to use investment income from the state’s $54 billion permanent fund, money that currently gets distributed to citizens in the form of dividends.
Louisiana, North Dakota and Oklahoma all have negative credit outlooks, the ratings agency added. “These states are experiencing large budget gaps, and governing constraints create challenges for developing sustainable solutions,” Moody’s said. Louisiana’s severance taxes and royalties from oil and gas have dropped to half of the $1.3 billion level in fiscal 2014.
In Wyoming, Gov. Matt Mead has proposed $248 million in budget cuts, or about 9 percent of the fiscal 2017-18 biennial budget. And while unemployment rates have eased nationally, Wyoming’s has climbed to 5.6 percent from 4.2 percent since May 2015.
A drop in oil and gas activity has dealt a severe blow to local governments too, especially Williston, N.D. (heart of the Bakken shale oil boom), Gillette, Wyo., and Midland and Odessa, Texas.
North Dakota “distributes a share of oil and gas production taxes to local governments based on industry employment and production volume,” Moody’s said. Oil and gas workers made up 66 percent of Williston’s labor force in 2016, 40 percent of Dickinson’s and 14 percent of Minot’s. Almost 80 percent of Williston’s general fund revenue comes from the production tax, which Moody’s said declined 10.5 percent in fiscal 2015 and would decline further in 2016.
Williston’s public school district received 27 percent of its revenues from its share of oil and gas production taxes in fiscal year 2014. That share has plunged and now the school board is projecting a deficit for the current year. But if the families of oil and gas field workers start moving elsewhere, the strain on local schools and other services such as roads and emergency services might ease.
Moody’s said many cities have built up rainy day funds. It said Minot and Mandan, N.D. have reserve funds equal to a year of operating revenue. Williston had stashed away $11.4 million at the end of fiscal year 2015, equal to about three months’ revenues. But even those funds will be challenged as oil prices languish.
Some states are doing bettter, notably Texas and California, the country’s first- and third-biggest crude oil producers. In the 1980s, when oil prices fell, the Texas economy crumbled. Hundreds of banks went out of business, real estate prices collapsed, and it took years before the economy turned around.
Today, the Texas economy is much more diverse. “Strong growth in other parts of the economy, including professional services, information technology and financial services, is helping to propel growth, albeit at a more subdued pace,” Moody’s said.
Moreover, the ratings agency said, the Texas constitution “requires deposits to the state’s rainy day fund based on oil prices, which accumulated to $9.6 billion, or a healthy 9.1 percent of biennial forecasted revenue. Those reserves are still in place and provide a healthy cushion against economic and revenue under-performance.”