A decline in the price of oil, in concert with other factors like sluggish individual income tax collections and the use of one-time money, has already prompted midyear budget cuts in Louisiana and pushed next year’s anticipated budget shortfall to $1.4 billion.
But as oil prices continue to plummet, state officials are preparing for yet another round of reductions in early 2015 that will only exacerbate a sliding revenue picture.
In the meantime, the Bayou State’s oil and gas industry is already seeing signs of a minor curtailment. While production should remain high over the next quarter, the tamping down of exploration and drilling will soon begin as landmen layoff employees and companies pull back on their spending plans for the next 12 months.
The pinch is being more immediately felt on the state side, where the Louisiana government loses $12 million for every $1 decrease from the annual average price of oil, according to Greg Albrecht, the state’s chief economist. He said it could have been worse for Louisiana had the state not diversified its revenue sources over the past three decades.
“We’re not talking about a collapse in oil like we saw in the 1980s, when we lost half of the industry,” Mr. Albrecht said during a recent legislative committee meeting.
WikimediaThe storied oil bust of the early 1980s here created one of the most severe reversals of fortunes in recent history, back when 45 percent of the state budget was linked to oil and gas revenue. Today, only 13 percent of the overall state budget is reliant upon sources of energy money,
“It’s a major difference, between now and then,” Dr. Jim Richardson, an LSU economist who serves on the state’s Revenue Estimating Committee. “The margins are smaller. It’s only a couple hundred million right now, but in a budget that is already very tight, it’s difficult to go out and make that up from some other area.”
Still, Louisiana has a greater sense of vulnerability, Richardson said, when compared to other energy-producing states like Alaska, Texas and North Dakota.
“Texas is a bigger state and more diversified,” he said. “Alaska has its permanent endowment fund that buffers the downturn, though they will feel it eventually. In North Dakota, they are just beginning down the road and they may feel some pressure with a reduction in activity, but it’s not really going to show up for them right off the bat. It depends how far prices are going to go down.”
Gifford Briggs, vice president of the Louisiana Oil and Gas Association, which represents independents and majors in the state, said retrenchment on the part of industry will become more noticeable at the end of the first quarter of 2015 if prices continue to drop.
“I would not expect there to be a significant drop in the barrel production tomorrow,” he said. “Wells have already been drilled and production is already happening or about to happen and it just needs to be brought online. So you may see an increase in production in the short term. It’s the exploration and land side that are dropping off already.”
Cash flow and cost management are the buzz phrases among Louisiana’s oil executives these days, Briggs said, as they wait out the decline.
“You are seeing retraction in drilling and exploration activity all over the country,” said Briggs. “From what I understand, a lot of companies have obligations through March. But they are deciding now on how to treat the 2015 cycle and that’s where you’re seeing the reduction. So it may not be until March or April that you see a decline in production.”