Beyond the boom

Gov. Michelle Lujan Grisham, who has made diversifying the economy a focus of her agenda since taking office just over a year ago, is targeting several industries beyond energy.

From a numbers perspective, it’s hard to see a downside to the massive amounts of oil revenue flooding the state of New Mexico’s coffers.

But there is one: The windfall is enlarging the state’s dependence on the energy industry.

That may not be a problem right now. But it will be when the price of oil crashes again. And almost everyone — industry experts, politicians, economists — expect that it will.

After all, New Mexico experienced that debilitating thud only four years ago.

Gov. Michelle Lujan Grisham and state lawmakers are striving to reduce that dependency through a number of budget proposals aimed at diversifying the economy, some of which will be debated during the 30-day legislative session kicking off this week.

But it’s a complex, long-term task that has confounded and often eluded other commodity-dependent states. And even the most optimistic experts say the state’s efforts to wean itself from oil’s boom and bust lockstep may take the length of several governors’ terms, not just Lujan Grisham’s.

The governor, who has made diversifying the economy a focus of her agenda since taking office just over a year ago, is undaunted. Rather than focusing on one specific sector, her administration’s approach has been to target nine different industries.

“I get challenged to pick one thing — we’ll be the tech state, the startup state, the innovation state,” Lujan Grisham said in a recent interview. “We are all of those things, but we’re also small, and one of those things by itself is not going to transform our economy and completely diversify it.”

Lujan Grisham has included this multipronged approach in her budget recommendations for the legislative session. For instance, she wants to increase the Tourism Department’s budget by $7 million, providing another boost to the state’s national marketing campaign.

She aims to beef up staffing for state agencies in outdoor recreation and film, as well as allow eight new full-time employees for Spaceport America, which the state hopes will attract more aerospace activity as it ramps up to its expected first commercial spaceflight this summer. The governor also is calling for $10 million for a rural infrastructure project fund.

Her plan would build upon legislation passed last year that funded increases for tourism, paid off a backlog in the film industry and invested in local economic development projects.

And there is already growing investment in areas such as construction and outdoor recreation, as well as in renewable energy sectors such as wind and solar, said Jon Clark, deputy secretary of the state’s Economic Development Department. The agency said in 2019 it helped create more than 1,700 jobs, increased private investment by $740 million and awarded job-training grants for 2,100 new workers.

The state’s private-sector job growth was eighth in the nation in the first 11 months of last year, at 1.9 percent, while manufacturing and construction job growth both greatly outpaced national figures for that period at 3.8 percent and 8.3 percent, respectively, according to Clark’s agency.

“We’re seeing a lot of successes across the board,” Clark said.

Even so, New Mexico has become more dependent on oil and gas in recent years, not less.

An estimated 45 percent of general fund revenues are now tied to the oil and gas industry, up from around 35 percent in 2016. Nearly 70 percent of the revenue growth the state experienced between fiscal years 2018 and 2019 was related to energy, according to the Legislative Finance Committee.

And while New Mexico’s 2.6 percent economic growth in the third quarter of last year was the seventh-strongest in the country, according to the U.S. Bureau of Economic Analysis, and the unemployment rate has fallen steadily, a significant portion of those gains are because of the energy-related growth in the state’s southeastern corner.

For instance, in the first quarter of last year, nearly half of the 11,000 jobs the state added were in oil-rich Lea and Eddy counties, according to the University of New Mexico.

The growing dependence isn’t necessarily because of a lack of effort by state officials. It’s because of the significant gains posted by the energy industry.

Indeed, the more oil production and revenue grows, the greater portion of state revenue it accounts for, and output almost tripled between 2012 and 2018, while monthly output topped 30 million barrels for the first time last October.

Lujan Grisham’s emphasis on diversification, which other governors have sought, is based on a simple truth. If the state could draw more tax revenue from other sectors, it wouldn’t see such rapid declines when the price of oil crashes as it did in early 2016, when crude fell to $27 per barrel from over $100 per barrel less than two years earlier.

To be clear, diversifying sources of state revenue isn’t the same as diversifying economic development, said Jeffrey Mitchell, director of UNM’s Bureau of Business and Economic Research. The latter has other objectives, such as creating jobs, and its impact on state revenue can be indirect or marginal, he said.

But the two are related: Helping to grow other sectors of the economy can help the state draw more tax revenue from other sectors.

“At some point we’ll have a bust in oil and gas and for a lot of reasons, especially state revenue, we need to have an economy that doesn’t depend so much on one industry,” said Jim Peach, an economics professor emeritus at New Mexico State University.

Asked about the increasing dependence of state revenue on oil, Lujan Grisham responded that New Mexicans can’t ask for “instant gratification” on the issue. She says she’s only just beginning her efforts and that lessening a state’s reliance on oil is a long process that will outlast her time in office.

“When you don’t get it all done in one year, people get frustrated — don’t get frustrated!” the governor said. “I do expect that in 10 years people feel completely different about our reliance on one economic sector.”

But judging by the experiences of other states in a similar position, reaching those goals could take a long time.

Other oil-rich states

Take North Dakota. The state began efforts to diversify its agriculture-based economy back in the 1990s. It pursued production of value-added products such as pasta and ethanol, and it passed property tax and sales tax exemptions to encourage industry.

Yet despite those efforts, when the massive fracking boom in the state’s Bakken Formation came in the first half of the last decade, oil took a commanding position among the state’s revenue contributors.

Since then, the state has taken on a multitude of initiatives to try to lessen that dependence, from pursuing the petrochemical industry to boosting university research in technology, said state Sen. Rich Wardner. But it still hasn’t been easy.

“It’s so slow and so gradual that I would say a lot of these value-added products were growing and then the oil came and engulfed it,” said Wardner, a Republican who is the state’s Senate majority leader. “It overpowered it.”

Still, he said, if it wasn’t for the state’s years of diversification efforts, North Dakota would have faced an even larger budget deficit when energy prices suddenly fell in 2016.

“It would have been a larger gap — no question about it,” Wardner said.

That oil crash was devastating for many states that depended on oil and gas severance taxes for revenue. Alaska faced a $3.8 billion budget deficit in 2016, Louisiana’s shortfall was $2 billion and Oklahoma’s grew to $1.3 billion. North Dakota had to slash its budget and tap its rainy day fund as the state’s severance taxes fell dramatically.

In New Mexico, the combined deficits for 2016 and 2017 amounted to more than $600 million. Legislators called a special session in October 2016 in a bid to rebalance the books with spending cuts and transferring money from unspent balances.

“You couldn’t find a happy face anywhere in Santa Fe in 2016 and 2017,” Peach said. “The situation is a lot different now, but there are a lot of people who understand that this could go away again.”

Yet understanding the problem in oil-dependent states hasn’t solved it, said Adam Kamins, senior regional economist at Moody’s Analytics. Texas is an exception, but it had a larger, more diverse economy to begin with. It’s the smaller oil states like New Mexico that have the greatest challenge.

“You hear intentions to really diversify away from a dependence on energy, but I don’t think any of them have meaningfully shifted away from oil,” Kamins said.

Tax code and education

So, what to do in New Mexico?

Economists say a goal of diversifying state revenue can have more success if an entire menu of options is employed, not just the chef’s specials of attracting new industries and job growth.

For instance, another, quicker method would be to reform the tax code to eliminate the many deductions and exemptions the state grants, Mitchell said.

“If what you really want to do is diversify the state revenue base, you’re going to have far more impact by changing those things than you are in terms of creating jobs in other sectors,” he said.

But while state House Speaker Brian Egolf said in October he was considering such a proposal for the upcoming session, members of the Legislature’s interim tax committee later said it was unlikely this year, and there’s no tax reform bill on the legislative agenda released by Lujan Grisham last week. Legislators would likely need to spend more time studying what is a very complex — and probably politically risky — proposition.

In any case, growing other sectors of the economy is a more durable solution because changes to the tax code can be undone down the road, Kamins said.

“Fundamentally changing the economy is more durable, but on the flip side, it’s a lot harder to do,” he said.

Also, Mitchell believes the best long-term strategy is one that is already atop the Lujan Grisham priority list: improving education. It’s a goal other governors have emphasized but have long struggled to achieve.

“You have to create a workforce that is attractive to business, that has the ability to adapt skills to opportunities,” he said. “That is the single most important economic development strategy you can put forward.”

Education would receive nearly half of the proposed new recurring spending under the governor’s budget plan. Among her initiatives is a one-time, $320 million appropriation to create a permanent fund for early childhood education, and to put $35 million toward the governor’s proposed Opportunity Scholarship, which would help eliminate tuition and fees for New Mexicans attending public community colleges and universities.

But it would take a long time — it takes more than a decade for a kindergartner to receive a college degree or certificate — to see the impact of such efforts on the economy and state revenue. That will require future governors and Legislatures to buy into the plan as well.

“We’re talking about a 10- to 20-year project,” Mitchell said.

Clark of the Economic Development Department said that even if some of the recent job gains were because of oil and gas, New Mexico was still in the top 10 states in the U.S. in job creation over the past six months and had its best year of job growth last year since 2005. It’s progress that comes after the state’s 10-year employment growth between 2009 and 2019 was tied for the fifth worst in the nation at 2.55 percent.

The state is seeing higher wages, too. Jobs related to Local Economic Development Act projects had wages 19 percent higher in 2019 than the average during the eight years under former Gov. Susana Martinez, Clark said.

Still, it’s clear that there’s a lot more work to do. Work that may take decades.

“It’s key to recognize there’s no silver bullet that will solve everything tomorrow,” Clark said. “We certainly need to start taking action today.”

Reporter

Jens Gould covers politics for the Santa Fe New Mexican. He was a correspondent for Bloomberg News in Mexico City, a regular contributor for TIME in California, and produced the video series Bravery Tapes.

(8) comments

Tom Ribe

We might stop calling the oil and gas industry the "energy industry". Energy is also wind and solar and nuclear etc. Oil is just part of energy. Second, we have to wean ourselves from oil and gas because those energy sources are destroying our environment. They are causing global heating which is a huge disaster unfolding. They waste and pollute groundwater that we need for people. And not believing it doesn't make it go away. We can't destroy our environment as a method of funding our lives. Period. Thank you Governor for your efforts here. Your predecessor was 100% oil like Donald Trump and so many republicans. But they will come around eventually once they stop worshiping Trump and decide to help the country rather than be greedy.

Tom Aageson Aageson

Diversifying the economy is challenging. Marijuana is a loser, all low paying jobs to put our community on a high. Tourism spending on the same products/destinations and seasonal cycle produces little for restaurant dishwashers. Where's the beef? What am I missing? 90% of all new jobs are coming from entrepreneurs nationally. Invest in a healthy ecosystem and innovation with more research will produce jobs.

Chris Mechels

Troubling is that MLG and the Trifecta have no respect for the NM Constitution. The short session is not intended to bring new Legislation. Its for budget bills and urgent bills "needed" for the Executive to function. The Trifecta is simply running their political agenda, and don't respect the Constitution. MLG should have more respect for our laws. Most of the bills she's bringing should NOT be brought until next year. Seems she just can't wait, and impatience in NOT a good trait for a Governor.

Mike Johnson

This is an amusing article in many ways. After a lifetime in the petroleum industry, and living in cities like Houston and states like Texas and countries like Norway, entities just as "dependent" and tied to petroleum, which very easily navigated ups and downs and remained successful and prosperous through every cycle, I find the fact these nincompoops and incompetents cannot manage through all this to speak volumes about this state's government and society. These politicians need to look in the mirror, there you will find the problem, not being "dependent" on petroleum. Many states would love to have an industry that over 100 years has been the backbone of the state, and endured. It works in so many places, why is NM having this problem to the point of wanting to remove the industry from the state, like it is heroin or something? Maybe that also tells you something about this "state" and why Lew Wallace recognized it so many years ago, nothing has changed.

Jerry Appel

I agree with you about the idea that petroleum has been an economic contributor for a century, but that same contribution has resulted in climate and environmental destruction. Whether you like it or not, the whole world is moving away from combusting fossil fuels, and ignoring the problem does not fix it. Using the current windfall to create trust funds for long term improvements is wise and prudent. Meanwhile, the state does need to find other income sources and "sin" taxes have been used longer than petroleum. Your simile with heroin and petroleum is apt, feel good now, junkie later.

Tom Ribe

Dr. Johnson, you don't understand pollution and the climate crisis. Either that or you are in denial. We understand that many conservatives don't acknowledge science. Belief that the climate crisis is not real is a religion. It is a fantasy.

Mike Johnson

I am a Ph.D. earth scientist (MIT, Rice Univ. NMSU), with much of my education in paleoclimatology and the earth's climate history, and no there is no crisis if you are educated in the scientific facts. Tell me Mr. Ribe, where did you get your education and what was it in? That should be amusing.....

Jerry Appel

As a New Mexico educator I am quite happy somebody is thinking about weaning the state off of black gold. The approach by the Martinez administration was to cut taxes and grow business. Major fail! No tax revenue, no roads. Governor Lujan-Grisham's all of the above approach is admitting know one really knows what the magic bullet is for this state, but let's try until something works. Most educators would fully agree with the idea of creating a permanent trust fund for preschool so that those critical years are never underfunded again. In the Gadsden ISD, every high school has its own Pre-K center (locally funded) which functions as a training ground for future teachers. For a better picture of where I teach read this: https://www.lcsun-news.com/story/news/local/new-mexico/2020/01/17/ice-internment-facility-near-chaparral-new-mexico-undocumented-immigrant-community/4494224002/

More money going into education as a solution is once again blaming education for socio-political failure. It is income inequality that is the real culprit. My students have to work to support their families and/or miss school days to provide child support. This leads to poor outcomes and hopelessness. The poverty cycle is not being interrupted because the root of poverty is not being addressed. Fix those issues and everything else gets better. Give people the audacity of hope and they will step up.

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