Oil plunge raises economic questions
March 11, 2020
CHEYENNE — Oil prices worldwide suffered a major hit over the weekend, reaching a four-year low in the United States, and the rapid changes in the global economy could have major implications for Wyoming.
U.S. oil prices were down by as much as 34% on Monday, largely due to two factors: a price war between Russia and Saudi Arabia, and dropping demand as the coronavirus continues to spread globally.
The effects of the rising supply and dropping demand of oil could be felt in Wyoming, where oil extraction is a linchpin of the state’s economy. The price plunge came in the days immediately after the House and Senate reached a tentative agreement on a budget for the 2021-22 biennium Friday.
Wyoming is already facing a structural revenue deficit of over $150 million in the 2021-22 biennium – and a roughly half-a-billion-dollar deficit projected in the next five years. But those projections had oil selling at a much higher price than where it sat over the weekend.
After reaching a tentative agreement on the budget last week, lawmakers on the Joint Appropriations Committee, including co-chair Sen. Eli Bebout, R-Riverton, wondered how to deal with the issue in a meeting Monday morning.
“Had it happened a month ago, we might have had a whole different look on how we did things,” Bebout said. “We still have that huge part of our revenue that’s dependent on minerals that are just getting hammered, and we haven’t really done anything. Whether you believe in reduction or revenue enhancements, we’re not there.”
Committee co-chair Rep. Bob Nicholas, R-Cheyenne, responded with slightly more optimism.
“There’s no doubt that next session, we’ll be looking at both,” he said. Yet depending on what happens in the global economy, the state’s revenue profile could look much grimmer by the start of 2021.
Wyoming is projected to have oil prices of $50 per-barrel in 2020 and 2021, according to the October report from the state’s Consensus Revenue Estimating Group. As of Monday, the per-barrel price for West Texas Intermediate oil – which typically hovers about $5 over Wyoming’s prices – sat at about $30.
While it’s uncertain whether these trends will continue, any drop in oil prices could have major implication for the state, which benefits from oil production through various tax revenues. For every $5 drop in oil barrel prices that lasts for at least a year, Wyoming would see its revenues drop by about $70 million annually, Wyoming chief economist Wenlin Liu said in an interview Monday.
Liu added he didn’t think the price drop would last that long, though he acknowledged the extraordinary uncertainty added by factors like the coronavirus. While there is some optimism the virus will weaken in the spring, University of Wyoming energy economist Rob Godby said there are no answers on how long the price war in the Middle East could last.
“It could be a few days, could be a week, could be a month, it could be longer,” Godby said. “The state can’t really react to this until we have a better idea of what that answer is.”
If – and it’s a big if – Wyoming’s oil prices were to stay at $25 per-barrel, the state would get about half of the tax revenue from oil that it’s currently anticipating.
Beyond a potentially devastating impact on the state’s coffers, Godby noted the current market could have long-term effects on oil production in Wyoming. While oil companies likely won’t make any changes until there is more certainty on how long these trends will last, they could eventually start ramping down production to adjust to the market.
The price drop also serves as a reminder to Wyoming, which is the eighth-largest oil producer in the U.S., of the market’s extreme volatility. From the 1980s until 2010, Godby said the oil market was well-known for its fluctuations and unpredictability, but those kinds of rapid changes haven’t been as common in the past decade.
“As we become more and more dependent on oil, until we change our revenue structure to find other sources of revenue, this is the sort of problem that will occur,” Godby said. “Not only are we dependent more and more on one commodity, but that commodity that we’re depending on is much more volatile than what we’re used to. And by extension, it’s going to create increased volatility in our revenues, and we already have one of the most volatile revenue streams of any state.”
Godby is a member of Gov. Mark Gordon’s Power Wyoming initiative, a planning group that provides analysis of the state’s future revenue streams. The group has been in “wait and see” mode until the end of the legislative session this week, and Godby said the group will be careful with its analysis.
“What’s important is not to panic, but to try to get your bearings and to try to understand what’s going on as well as possible, then try to do the appropriate analysis after you know what questions have to be asked,” Godby said. “But right now, we’re still trying to figure out what questions need to be asked.”
Ryan McConnaughey, communications director for the Petroleum Association of Wyoming, said his members are closely monitoring the situation.
“Our concern is more if this becomes a sustained, $30-ish per-barrel price over the long term,” McConnaughey said. “I think that’s where it could really cause some issues.”
The coronavirus could have a particularly outsized impact on Wyoming’s economy this year. In the JAC meeting Monday morning, Don Richards, the state’s budget administrator, noted the larger hit that the virus could bring to Wyoming’s sales tax revenue, with the likelihood of the global tourism industry taking a hit due to reduced travel.
Depending on what happens in coming weeks, the economic turbulence could force another CREG meeting to update the group’s revenue projections. CREG has not held an emergency session since May 2009, when the United States was in the midst of the Great Recession.
“There is a provision for CREG to meet in emergency session,” Richards said in the JAC meeting Monday. “I think there is a certain likelihood of that occurring in the near future.”
A spokesman for the governor told the Wyoming Tribune Eagle that Gordon will be waiting a few weeks before deciding whether to call a special CREG meeting this year.
While global market trends have been down over the past week, Liu noted other factors offering slightly more reason for optimism. Wyoming’s economy has not slowed down at the same pace as the worldwide market, and its unemployment rate is still relatively low.
“It’s not in panic mode yet,” Liu said. “Hopefully, we come to a normal situation soon.”