Lower gas prices may loosen up a little extra cash in consumers’ budgets, but for the state, lower prices at the pump signal a drop in the price of oil, which means less revenue for state services like health care and higher education.
This year’s state budget is based on the price of oil averaging $96.69 a barrel over the fiscal year, from July 2014 to June 2015, Legislative Fiscal Office Chief Economist Greg Albrecht says. But the price of oil has dropped into the low $80s over the past several weeks. “Dropping as sharply as it dropped,” Albrecht says, the average will likely be under $96 per barrel for the fiscal year. “To average $96, I need weeks or months [of prices] over that.”
For every dollar that the annual average price of oil drops, the state loses roughly $12 million in its budget, Albrecht says. Taxes on oil production made up 13% of revenues in the last fiscal year budget, according to Albrecht.
“If [the price of oil] stays this way for a while, it should cause anxiety,” but it’s not time to panic, according to Jim Richardson, an economist with LSU who is also involved with the budget process. Richardson estimates the state could bring in roughly $200 million less than the $808.2 million it is projected to collect in severance taxes this fiscal year, or $50 million less for every three months the price stays down.
That’s only a small part of the entire budget, Richardson says, and the entire shortfall will not be a net loss for the state because other tax sectors, like sales tax, could see a boost if consumers have more cash on hand. The economists both say that sales tax likely won’t bridge the entire hole, which could grow wider over time if the price does not rebound.
State estimates figure in peaks and valleys in the oil price by basing the budget on an average price of oil throughout the year, rather than a high or low price of oil. That means the price has to stay consistently under the projected average to negatively affect the budget. The averaging method is especially well-equipped to handle seasonal variations, Albrecht says.
In the three fiscal years before last fiscal year—which ended in June 2014 and the final figures for which haven’t been determined—the actual amount of severance tax the state drew in was always higher than what was originally estimated, even if the state redrew its estimations downward midway through the year.
Albrecht says state economists don’t yet know what the damage to the budget could be for the current fiscal year. The committee that chooses an official forecast likely won’t meet again until December or January, Albrecht says.
“We haven’t sat down and done the work, but we can tell we have a negative contribution in minerals right now,” Albrecht says.
Division of Administration Commissioner Kristy Nichols says in a statement to Daily Report: “Our economy is growing in many industries. This year we’ve already recorded more than 40 project wins in a variety of sectors. Low oil prices also have an immediate impact on Louisiana families, giving them more money to spend on other expenses. Ultimately, that helps the state’s economy and its people.”
Editor’s note: This story has been updated since original publication to include a statement from Division of Administration Commissioner Kristy Nichols.
