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Fiscal Cliff: The Oil Factors

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Louisiana Department of Natural Resources
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“Prices at the pump don’t seem to have a bottom yet.” Legislative Fiscal Analyst Greg Albrecht says while that’s good for consumers, it’s very bad for the state budget.

Louisiana’s budget gap for the fiscal year that starts July 1, 2015 has widened by $400-million due to declining oil royalties and severance taxes — directly attributable to the fall in oil prices.

House Speaker Chuck Kleckley, looking for a silver lining within the budget storm clouds, says he thinks sales tax collections should increase, since drivers have more spending money with the price at the pump dropping every day.

“In June, it was costing me about $70 to fill up my Yukon. Today, it costs me about $40,” Kleckley observes. “I’m gonna spend the extra dollars I save, and it’s gonna generate sales tax.”

Albrecht agrees in theory, saying, “Eventually people should start loosening up a bit.” But state sales tax collections are not yet indicating that is the case.

There are additional effects on state revenue, beyond the drop in direct oil income. Louisiana Economic Development Secretary Stephen Moret says the price plunge is starting to impact development of planned energy industry projects.

“Companies that have significant oil business are getting a lot less revenue from their oil business than they were before. That means they have less cash flow to be able to fund some of these projects,” Moret explains.

Just last week, Sasol announced it was delaying construction on a $14-billion gas-to-liquid plant near Lake Charles — because of oil prices. That means fewer new jobs, slowing anticipated growth in income tax and sales tax collections for the state.

Albrecht says there’s a snowball effect to all this, for as oil becomes less profitable, smaller drilling operations back off their development plans, as well — most notably those drilling new wells onshore.

“Less production will occur. Less investment will occur. Rigs will be mothballed,” Albrecht states flatly.

And workers operating those drilling rigs will be laid off, meaning less income tax and sales tax will be collected from them.

Tomorrow: The injury report: who gets hurt most by Louisiana’s fall off the fiscal cliff.