Oil strikes back

When the Board of Equalization met last week and certified more revenue for the upcoming fiscal year, there was one word on everyone’s mind: Oil. Of the total $106 million increase in the February estimate compared to the Board’s initial estimate in late December, $64.3 million was attributable to expectations of higher oil revenues.  Higher revenue projections were based on the assumption of rising oil prices – the Tax Commission is forecasting an average FY ’12 price of $90.77 per barrel –  and increased production.

If these assumptions prove true, they will continue a rather dramatic shift in Oklahoma’s since 2008 as oil production has caught up to or surpassed natural gas production as an engine of growth in the energy sector.  After peaking in mid-2008, the price of both oil and natural gas plummeted in late 2008 and early 2009. Since then, the price paths of the two commodities, which usually move closely in sync, have diverged sharply, with oil reaching just under $90 per barrel in January 2011 while natural gas remains stuck at close to $4.00 per MCF.The divergent paths can also be seen in production data. Oklahoma oil production, which declined every single year between 1985 and 2005 and reached an historical low of just over 60,000 barrels in 2007, increased by 6,065 barrels between 2007 and 2009, returning to its highest level since 2001. We do not yet have complete 2010 production data, but monthly data through September suggests a slight increase from 2009. Oklahoma natural gas production, meanwhile, fell modestly in 2009.

Oil’s resurgence can be seen most clearly when comparing tax collections from the two commodities. The annual Executive Budget began reporting oil and natural gas revenue separately in FY ’91; until FY ’10, gas revenues outpaced oil revenues every single year, often by a margin of 3:1. Last year, oil revenues reached their highest level since at least 1991 ($377 million) and for the first time the state collected more revenue from oil than from natural gas ($355 million):

The increase in oil revenues compared to gas may partially reflect the impact of tax exemptions for various kinds of production: according to data provided us by the Oklahoma Tax Commission, $117.2 million in tax rebates were paid out in FY ’10, of which $98.2 million was for natural gas production compared to just $19.0 million for oil production. Over 95 percent of the rebates were for horizontal wells and deep wells drilled below 15,000 feet. The credits paid out in FY ’10 were for production during the 18 months prior to July 2009.

Even as the rising price of oil contributes more to state revenues, it’s a matter of concern as to how it may hurt other sectors of the economy. At least some of the benefits to Oklahoma will be rolled back by individuals paying more at the pump and higher shipping prices affecting businesses of all kinds. With little to no slack in the oil supply and inadequate alternative infrastructure such as mass transit or CNG refueling stations, oil price spikes create a risk of prolonging the recession nationwide.

We’ll be putting out an updated fact sheet on gross production taxes and exemptions in the coming weeks – you can see the 2009 version here.