Experts Size Up the Impact of Those Plummeting Oil Prices

The upshot here: oil prices might not rebound to previously anticipated levels but unspent revenue cushions the blow to key revenue sources.

While oil prices have been on the downturn for the last year, many fiscal experts remain unfazed by the plunging prices’ potential impact on several key state revenue funds.

Revenue generated from oil and gas production is divided among the General Revenue fund, the Rainy Day Fund and the state highway fund, said Chris Bryan, a spokesman for Comptroller Glenn Hegar.

Here’s a quick breakdown:

General Revenue Fund: this fund is built through a variety of means, including tax revenues and fees resulting from licenses, fines and other penalties. Taxes on motor fuel, oil production and natural gas production make up a significant source of the fund’s revenue. 

Rainy Day Fund: this serves as a “just in case” fund where the state stores excess revenue for revenue shortfalls. Money in the fund comes primarily from natural gas and oil tax revenues. The total contents of the fund cannot exceed 10 percent of the total general revenue budget.

State Highway Fund: this fund is filled using state motor fuels tax proceeds as well as federal funds. The money is used to support the state highway system, environmental damage from highway construction and DPS law administration.

Using historical tracking of certain data, James LeBas, an economist with the Texas Oil and Gas Association, said he was able to calculate the revenue generated by oil and gas industry taxes that would go towards these state funds. Every dollar, if the price per barrel were $40, would generate about $43 million for the General Revenue fund and about $17 million for the Rainy Day Fund and the highway fund, he said.

While many experts agree fluctuating oil prices and production rates can certainly impact state finances, the extent of that impact remains unclear. Bryan said none of these funds would likely see a significant dip in their contents due exclusively to these falling commodity prices. 

The highway fund is the most vulnerable because of the transportation department’s reliance on the fund and constant withdrawals from the fund.

We asked a couple of state revenue experts to weigh the impact of fluctuating oil prices on state finances. Here’s what they had to say:

Oil prices and secondary effects of oilfield activity impact the balance of revenue funds and also impact the economy of local communities…

Dick Lavine, a senior fiscal analyst for the Center for Public Policy Priorities: “We have a much more diversified economy, so not only do we get oil and tax revenue, but, for instance, the sales tax gets a moderate amount of money from oil drilling because a lot of the drilling equipment being purchased, especially the pipe, is subject to sales tax. You have to look several places to see where the money is coming from… The point is we now have a diversified economy. We have high tech, we have manufacturing and we have all sorts of services.”

Dale Craymer, president of Texas Taxpayers and Research Association: “We’re going to see some dramatic changes at the local level. The oil industry is still probably one of the biggest taxpayers in the state, but it has ancillary effects well beyond that because, particularly in South Texas as you see drilling slowdown, they’re not building the homes they used to. It will impact construction activities.”

A revenue cushion exists even if oil prices don’t rebound to previously anticipated levels of $65 to $75 per barrel...

Craymer: “In general, the revenue estimate is probably in pretty good shape, which means we’re on target for a surplus. As prices get below that estimate, that surplus probably diminishes.”

Lavine: “Today, it looks like the $65 [estimate] is probably going to be too high, but we’re talking about the full biennium that starts next week. So it’s always difficult for any comptroller to forecast that far in the future, but because they left so much available revenue unspent, there should be no problem paying for the entire 16-17 budget, even if the oil never gets back up to $65.”

A sustained plunge in oil prices is unlikely to dramatically alter any state funds for now...

Lavine: “We would have less oil and gas severance tax revenue, but we have a cushion because [lawmakers] didn’t spend all the money available to them last time, mainly because they were unwilling to exceed the constitutional limit on spending.”

Craymer: “We’re sort of standing on unusual ground for us. In years past, the Legislature spent every dollar that was available. But this time, they left [money] in general revenue. That’s even outside of the Rainy Day Fund. We’ve got a good cash cushion on the state level to weather this.”

If oil prices remain at $40, state officials could alter the state budget accordingly…

Craymer: “Once oil prices stabilize, even if they stabilize at a lower level, that at least provides the industry with some degree of certainty. If they’re less concerned about prices dropping, they can work with the prices at that time and make some adjustments.”

Lavine: “As it turns out, for better or for worse, they have a cash balance that will allow them to fully fund the coming budget, probably with lower oil prices not being a problem.”

While the oil and gas industries play a major role in financing the state budget, this reliance can be detrimental to state finances because of a lack of diversity in funding and the difficulties that come with predicting it…

Craymer: “It’s a challenge because your revenue estimate is often times as good as your oil prices forecast. It’s just a fact of life that we’ve become used to on the Texas fiscal front.”

Lavine: “We are in better shape than 25 years ago because we’re not as reliant on oil to fund the state budget and the state’s economy is not as reliant on oil. Now, there are obviously certain parts of the state that just exploded in the last five years that are going to shrink back if things don’t change… But the state as a whole should be able to be OK unless something happens in the global economy.”

Disclosure: The Center for Public Policy Priorities is a corporate sponsor of The Texas Tribune. A complete list of Tribune donors and sponsors can be viewed here.