Oil Prices Don't Jibe With Texas Budget Forecasts
This week, oil prices dropped below $50 for the first time since February, a development that could upend the state's predictions of oil revenue for this year.
Estimates from the Comptroller of Public Accounts put oil prices at an average of just over $64 per barrel in 2015 and 2016. And, as of now, those predictions are rosier than the reality of the market, meaning the state's loss in oil and gas tax revenue could impact the Texas budget going forward.
In January, when Texas Comptroller Glenn Hegar released his estimate of how much tax revenue the state would bring in for the Texas budget, he did so with a caveat.
“Every single day I’m going to wake up and we’re going to be monitoring the economy,” Hegar said. “To make sure that if anything changes, we’re going to make sure that leadership, legislative, the governor’s office, the press, and the people of Texas know.”
Hegar said he’d be paying especially close attention to the price of oil. Texas brings in billions of dollars in taxes on oil and gas production. When the price of oil drops, tax revenue drops with it.
This week, it's likely Hegar didn't like what he was seeing. The value of West Texas Intermediate oil again dipped below $50 a barrel.
“Prices are probably below where we would like to have them, not only for industry but for the Texas state budget as a whole,” says James LeBas, an industry analyst whose clients include the Texas Oil and Gas Association and who spent years in state government estimating budgets.
The U.S. Energy Information Administration forecasts crude oil prices of West Texas Intermediate to average at about $55 per barrel for 2015 and $62 per barrel for 2016, according to the agency’s short-term energy outlook.
The comptroller’s office estimates average prices of $64.35 per barrel in 2015, $64.52 per barrel in 2016 and $69.27 in 2017, according to the Comptroller’s Biennial Revenue Estimate.
To meet the state’s estimate of $64.35 for 2015, the price of crude in Texas would have to hover at about $70 for both July and August to meet the projection from the Comptroller’s Office. But, seeing as the EIA’s short-term outlook projects average prices of crude oil to hover around $58, it seems unlikely the state’s projection will hold up.
If the comptroller’s office misses the mark on oil prices, it wouldn't be the only one – projecting the price of crude is notoriously tricky.
“Oil prices have always been the hardest thing to forecast,” Lebas says. “It’s subject to the shocks of both supply and demand in far-flung countries.”
Though, the most recent dip in oil prices is attributed to larger-than-expected reserves right here in the U.S.
If oil prices end up lower than the state's projections, it doesn't necessarily put the full budget estimate in question. The state brings in money in other ways, like sales tax, that could produce more or less revenue depending on economic factors.
Still, while lower oil prices don't necessarily doom the state's revenue outlook, they could have a multiplier effect on the economy.
“It might not be so good for a state like Texas,” says Jared Anderson, the managing editor of the energy news and information website Breaking Energy. “That’s where you see a lot of independent producers that will not be paying as much tax and royalties to the state government, not to mention all the employment and the ancillary effects of the drilling boom.”
So is it time to re-evaluate the budget estimates? The comptroller’s office says “not yet.”
“Well we’re always monitoring everything. But at this point we don’t have any plans to adjust the revenue estimate,” says the Comptroller’s press secretary Kevin Lyons.
Lyons says the office traditionally updates the budget estimate in December, so it's likely we'll see some new estimates then.