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Oil Causes An U.S. Economic Budget Crisis

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The 2016 fiscal year is coming to a close this week. 

As it does, legislators throughout many oil-rich states are struggling to do the impossible.

In the face of falling oil prices causing massive declines in revenue, lawmakers are still attempting to balance their budgets like the law requires them to do.

Nearly twelve states have not enacted budgets for the upcoming fiscal year, according to the National Conference of State Legislatures. 

Louisiana, Alaska, and many others are facing the possibility of a major budget crisis. 

Louisiana and Alaska alone are facing budget gaps of nearly $4 billion, even after making painful cuts.

The rankings for the upcoming America’s the Top States for Business by CNBC could even be altered by the low oil prices.

The following list shows the CNBC’s America’s Top States for Business Top Five ranked states:

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  1. Georgia
  2. Texas
  3. Utah
  4. Nebraska
  5. North Carolina

This ranking is based on factors such as economic and job growth, and our economy considers state fiscal conditions. 

The following states could not only find their rankings but their economies as a whole struggling in 2016:

1. Alaska

Remember Palin?

Remember back when Sarah Palin was the governor of Alaska?

Back then, around July 2008, the North Slope Crude oil was approaching a record price of nearly $144.

As Palin was being named GOP vice presidential nominee for the upcoming election, people viewed “Drill, baby drill” as a no- brainer.

In those days, Alaska relied on oil for approximately 90% of its overall revenue. 

The more oil that was pumped, the more taxes for the state, the smarter politicians for the state appeared.

Meet Bill Walker

However, Palin’s successor had the biggest challenge. 

Bill Walker took over as Governor of Alaska at the end of 2014. 

During this time, oil prices were mere weeks from hitting an all- time low.

The following graph, from Wikipedia, shows the Alaska Crude Oil production by barrels per day from 1975 until 2010.

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The Budget goes Down Hill

Since this time, however, they have rebounded a little. 

They are still around two-thirds below their peak price at about $48 per barrel. 

Walker began the current legislation session facing a budget deficit of around $4.1 billion.

After five months, consisting of the regular legislation session and a special one, Alaska’s legislature was finally able to pass a budget. 

They managed to get the deficit down to around $3.2 billion. 

However, even this nearly depleted the state’s backup funds.

Walker has managed to hold off on signing the budget into law.

Beginning on July 11, he has even called the Legislature back in for another special session.

Walker wants legislators to pass his proposed deficit reduction package. 

This package includes the reinstatement of state income taxes and overhauling the approximately $50 billion “permanent” fund. 

The permanent fund pays for the annual dividends Alaskans receive and represents the population’s share of the cumulative oil wealth.

What Next?

Walker only has until June 30 to sign the budget into law. 

He can veto portions of the bill if he decides to sign it. 

If he vetoes parts of the law, doing something like eliminating permanent fund dividends altogether, he can force legislators into action for the July 11 session.

Walker has been keeping his cards close up to this point. 

However, he told CNBC in March that the status quo would no longer hold. 

He stated that Alaska said they were going to live off one commodity and that his reply to that was hey, let’s get off this.

Walker’s plan, any other and maybe even this one, would be considered an act of complete political suicide. 

His plan involves taking the Permanent Fund and changing it into a type of endowment. 

The Fund could then be used to help cushion the current economic crisis and solve those that may arise in the future. 

Permanent Fund dividend payments were a record of $2,072 last year. 

This means that a family of five received a check of $10,360 just because they lived in Alaska. 

Walker’s proposal would take a portion of the earnings and put it toward reducing the budget deficit. 

This would cut payments approximately in half.

Republicans have introduced competing proposals. 

However, Walker states that while these proposals would trim the dividend, it would not cut it as much. 

Republicans are also fighting to delay or eliminate the proposed income tax.

Democrats, on the other hand, are stating that the oil industry should feel the burden. 

Naturally, the oil industry is against this idea.

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2. Texas

Top State for Business?

Texas has always been in the top two Top States for Business rankings. 

This is, of course, except 2008, 2010, and 2012 where the state fell in third place. 

Each time the state fell into third place, it was because the domestic oil and natural gas boom play a huge role in their economy.

It is said that falling oil prices will test the Texas economy big time. 

The following graph, from Wikimediashows the statistics of crude oil production in Texas annually from 1935 to 2012:

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Oil production takes place in the following Texas counties:

  • Karnes
  • LaSalle
  • Dewitt
  • Dimmit
  • Gonzales
  • Andrews
  • McMullen

What’s the Texas Economy Doing?

Somehow, Texas has managed to continue to see a rise in their economy even in the face of falling oil prices.  

In 2015, the state GDP increased by 3.8 percent. 

The economy saw gains in both construction and information. 

The U.S. Bureau of Economic Analysis stated that the growth in Texas matched the growth rate from 2014, before the fall of oil prices.

Economists have worried that Texas was facing a recession as bad as what they did in 1980 during the oil shock. 

The oil shock was a time when real estate prices bottomed and unemployment was rampant. 

As of right now, however, that oil crisis was longer and more intense than this one.

Why is the Texas economy continuing to grow?

Many analysts are still saying, however, that efforts made after the oil shock aimed at insulating the economy from similar future crises may have paid off. 

Texas now has industries, such as healthcare and technology, that didn’t exist forty years ago and are now booming.

During the last oil crisis, Texas did not have the same amount of economic diversity as it does now according to Nick Samuels. 

Nick Samuels is a Senior Credit Officer and Vice President employed by Moody’s Investor Service. 

He further states that areas such as San Antonio, Austin, and Dallas with diverse economies have mitigated the low oil prices’ impact.

Entrepreneurs, particularly the ones employed in high tech, are welcomed in Austin and San Antonio.

What’s The Future Hold?

None of this has come about quickly, and it may or may not get easier in the future.

Texas is currently right in the middle of its two-year budget cycle. 

During the last budget meeting, the state took some painful cuts and had to reorganize state agencies to balance the budget. 

According to the National Association of State Budget Officers Texas is one of seven states that saw their revenues decline last year.

Samuels further said that the state may have the largest budget reserves out of all the states but continued low oil prices will have legislators facing tough decisions in January when they return to Austin. 

The budget reserves for Texas is projected to be around $10.4 billion by mid-next year.

Samuels further states that Texas is a state that is continuously growing. 

He says there are demands for education, transportation, and pension funding. 

Finally, he says the state will have to grapple with all of those issues next year.

3. North Dakota

From Boom to BOOM

No other place may even come close to how severe the impact of falling oil prices is in North Dakota. 

Over the past ten years, the oil production for the state has grown tenfold. 

The thriving oil shale industry was built virtually from nothing as the oil industry began to boom; resulting in an all-time national low unemployment rate and surging tax revenues.

The following graph from Wikimedia shows the monthly oil production for the state from 2005 until 2012:

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However, the collapse of oil prices has the North Dakota economy falling hard. 

Oil and gas exploration has declined, and the budget went from a $300 million surplus last year to a $1 billion shortfall in the current year.

Most of the Oil production in North Dakota takes place in the following counties:

  • McKenzie
  • Mountrail
  • Dunn
  • Williams
  • Lea

What’s the Impact?

Unemployment rates were 3.2 percent in May, meaning they are still low in North Dakota and jobs are still available. 

There are some positive things as the state moves forward according to Allen Knudson. 

Allen Knudson is employed by North Dakota’s Legislative Council as their budget analyst and auditor.

However, finding available opportunities is a lot harder now than it was before the fall of oil prices. 

According to the U.S. Bureau of Labor statistics, the only sector that showed year-over-year job growth was education and health services as of May.

Knudson says that it is the impact on sales taxes from falling oil prices that is putting pressure on the current budget situation. 

He further states that oil would make the biggest impact and that oil prices would need to be around $50-$60 per barrel before anything would get better.

What does this mean?

During its peak of exploration in 2014, the number of rigs operating in North Dakota was nearly 200.

According to the state’s Department of Mineral Resources, there are less than 30 rigs working today. 

These numbers are not promising when talking about a state receiving more than half its revenue from the oil industry.

The situation is not getting any better, either. 

According to new estimates, revenues in May are estimated to come up short once again.

Steep across-the-board cuts for state agencies, affecting everything from state health-care to state prisons, has already been ordered by Governor Jack Dalrymple. 

The state’s half-billion-dollar backup fund has also already been tapped. 

The fund could be entirely drained by the latest revenue shortfall.

That state’s economy grew by 6% in 2014. 

North Dakota’s economy was down more than 2% last year. 

The North Dakota boom that had the nation in awe seems to have passed.

4. Louisiana

And You thought They Were Just Swamp People

Many know the TV series Swamp People, showing the alligator hunting that takes place in Louisiana. 

However, many individuals do not realize that Louisiana is one of the most important states for oil-producing in the nation. 

The state is home to drillers operating in shallow coastal waters, shipbuilders, and even support companies that contribute to deeper offshore oil operation.

The following map from Wikipedia where oil and gas platforms were found in the Gulf of Mexico in 2006. 

As you can, a vast majority are found off the coast of Louisiana:

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What’s the Budget Like Here?

The state legislature and Governor John Bel (who is serving his first term) have been in crisis mode as the 2016 fiscal year comes to an end. 

The politicians have been fighting to close a budget gap for the 2017 fiscal year that could be as much as $800 million. 

This is the projected deficit after emergency spending cuts took place costing around $485 million.

According to the National Association of State Budget Officers, the end of the fiscal year saw state revenues down by 2.6 percent. 

They are predicted to be flat this year, however.

The logging and mining sector in Louisiana is an official category that includes the extraction of oil and gas. 

This segment had to let go of over 12,000 employees last year according to the U.S. Bureau of Labor Statistics.

The manufacturing sector in Louisiana is highly exposed to the energy industry. 

This industry lost almost 7,000 jobs this year. 

But, the state’s economy grew by 1.7 percent last year.

Who is it Affecting?

From Houma to Lafayette, local economies are feeling the sting of the budget deficit. 

Along the highway from Houma to Morgan City, Derricks can be seen stacked all along the freeway. 

Fishermen are even being affected as laid off oil workers try to find work within their industry.

A third-  generation drilling company known as Moncla Companies only had two out of eleven barge rigs operating this past spring. 

There was one stretch where its inventory didn’t move for an entire month.

Marc Moncla, co-owner of the company, stated that the situation was near desperate. 

He said that the slight rebound oil prices had in the past years did not help much, either.

 

The impact of falling oil prices is widespread.  

The U.S. isn’t the only place affected by this. 

While some areas can hold on, others are feeling the pressure to find a way out or crash and burn.

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