Short on gas: Low natural gas prices hindering budget turnaround

The continued weakness of natural gas prices and production is the most important factor accounting for Oklahoma’s disappointing revenue collections.  July collections from natural gas production to the General Revenue Fund (GRF) totaled just $22.2 million in July –  a 75 percent decline from revenues for the same month a year ago, and $42.1 million less than the estimate certified in February by the State Board of Equalization. More than half of the total revenue shortfall in the GRF can be attributed directly to falling revenues from the gross production tax on gas.

When the official FY ’10 certification was adopted in February, natural gas prices were at about $4.50 per MCF. This year’s revenue collection estimates were based on a projected average price of natural gas of $5.22 per MCF. But rather than rebound since February, natural gas prices have continued to fall. The most recent price ( Henry Hub spot price) was $2.76, according to the federal Energy Information Administration (EIA).

The EIA explains the continued weakness of natural gas prices as due to both supply and demand factors. On the supply side, they point to continued strength in domestic production capacity, specifically in unconventional gas fields such as the Barnett Shale in Northeast Texas and the Haynesville Shale in Louisiana. Meanwhile, the decline in economic activity in the industrial sector in particular is tamping down demand. They conclude:

The combined impact of these influences on the recent natural gas supply and demand balances has resulted in an inordinately high amount of natural gas in storage for this time of year.

The ongoing weakness of natural gas prices is being partially offset, however, by the recent recovery in crude oil prices.  The chart shows how the prices of crude oil and natural gas climbed up and fell back over recent years, before their paths diverged sharply this spring.  Crude oil, which is much more of an international commodity than is natural gas, seem to be benefiting from economic recovery overseas and less of a production surplus than natural gas.

oilvsgasUnfortunately, oil is far less important to the state’s economy and budget than is natural gas; as we noted in our factsheet on gross production taxes,  69.2 percent of gross production tax revenues in FY ’08 were from natural gas compared to 30.8 percent from oil. However, should oil prices stay high or keep rising, their gross production tax revenues could make up for  some of the shortfall in natural gas collections.  The budget’s revenue projections were based on oil averaging $35.73 per barrel, considerably below recent prices.  By statute, the first $150 million of gross production taxes on oil are allocated to three dedicated education funds; any amount above $150 million then spills over to the General Revenue Fund.  If oil prices remain high, the $150 million cap could be reached and a surplus could be used to help minimize the shortfall.

In the short term, unless and until natural gas prices begin to recover, the overall outlook for this year’s budget will continue to remain bleak. At the same time, this year’s wild  swings in both oil and gas prices remind us of the extreme volatility and unpredictability of this revenue source. Perhaps this experience will  serve as an impetus for serious budget reform ideas that would put more gross production tax revenues in storage in boom times for use when prices hit their next lows.


Former Executive Director David Blatt joined OK Policy in 2008 and served as its Executive Director from 2010 to 2019. He previously served as Director of Public Policy for Community Action Project of Tulsa County and as a budget analyst for the Oklahoma State Senate. He has a Ph.D. in political science from Cornell University and a B.A. from the University of Alberta. David has been selected as Political Scientist of the Year by the Oklahoma Political Science Association, Local Social Justice Champion by the Dan Allen Center for Social Justice, and Public Citizen of the Year by the National Association of Social Workers.

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