From the NASBO Budget Blog
Oil Price Shocks Should Benefit Most State Budgets; Pose Challenges for a Few
By Michael Streepey
Anyone who has filled up their gas tank in the past few months probably has noticed that fuel costs have gone down significantly. The price of oil has plummeted over the past six months, falling by more than 40 percent, from $115 a barrel to around $60 a barrel last week. Supply and demand factors are being blamed by some for the recent plunge in the price of oil. Production hasnâ€™t been cut by the U.S. or Saudi Arabia, the worldâ€™s two largest producers, leading to a supply glut, despite slow economic growth and projections for less global demand in the future. As a result, the price of oil is now at a five year low. According to Reuters, â€œThe Organization of the Petroleum Exporting Countries (OPEC), which accounts for a third of world oil output, sees 2015 demand falling to its lowest in more than a decade.â€
State budgets may be impacted by falling oil prices in different ways. States that have large amounts of oil being produced in their jurisdiction will receive less in oil severance taxes, as a result of lower prices. Additionally, if production is cut due to unprofitability, oil severance tax collections may decline further. However, most states are likely to benefit from the recent plunge in oil prices. The additional savings at the pump is leading to more discretionary income for U.S. consumers this holiday season, potentially bolstering state sales tax collections. Although, spending on motor fuel only represents a small portion of total household spending, so the impact on other forms of consumption from cheaper gasoline is likely to be relatively minor. The latest consumer price index data from the Bureau of Labor Statistics (BLS) estimates that spending on motor fuels represents 4.8 percent of total household consumption.
Some articles have noted that cheaper gasoline will lead drivers to fill up more often and drive more miles. However, industry analysts have found that gasoline consumption (or demand) is relatively stable, despite fluctuations in price. This means that cheaper fuel will likely produce little additional motor fuel tax revenue to help support state roads and infrastructure. A few states that link the gas tax with the price of oil, such as Kentucky and Pennsylvania, will likely experience a decline in motor fuel tax collections. Kentucky transportation officials are bracing for a projected $129 million drop in motor fuel tax collections beginning in 2015, when the stateâ€™s gas tax declines by 4.3 cents per gallon. Kentuckyâ€™s method of linking the gas tax to the price of gasoline can be more volatile during an energy crash, but the practice has also allowed the rate to rise from 12 cents to 30.8 cents per gallon from 1993 to 2014. During the same period, the federal gas tax has remained unchanged at 18.4 cents per gallon. As a result, the federal Highway Trust Fund is again projected to face solvency issues by the middle of 2015. The recent drop in the price of gas has revived some hopes amongst transportation proponents that Congress will now have the needed votes to approve a federal gas tax increase.
Some states more heavily reliant on oil severance taxes, such as Alaska, New Mexico, North Dakota and Oklahoma may face budget challenges if the price decline in oil is sustained for a prolonged period. Texas and California, the number one and three oil producing states respectively, have greater diversification and scale to their economies, and are less likely to experience budgetary pressures from declining oil prices. According to the U.S. Energy Information Administration, â€œCrude oil is produced in 31 states and two offshore federal regionsâ€”the Gulf of Mexico and the Pacific Coast. Of those 33 producing areas, 10 supply more than 90% of U.S. output.â€ The United States is now the largest producer of oil in the world, although shale production is much more costly than oil produced in other parts of the world such as the Middle East. As oil prices fall, more expensive production operations, such as those involving shale in the U.S., may need to be curtailed to remain profitable, a dynamic that OPEC producers are hoping takes place so that their share of the worldâ€™s oil market does not shrink.
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