Oil upswing boosts New Mexico revenue forecast

A drilling rig near Hobbs. Technological improvements and lower costs in the Permian are putting New Mexico on track to produce almost 400 million barrels annually by next budget year, according to the projections. Courtesy Hobbs News-Sun

RED RIVER — New Mexico’s oil bonanza is set to continue.

State government will receive an estimated $907 million in “new” money next budget year, with revenue projected at just under $8 billion as oil and gas production continues to increase in the Permian Basin, according to forecasts released Wednesday at a Legislative Finance Committee meeting.

That’s a 12.8 percent increase from the current year’s recurring budget level. The projections are a remarkable turnaround from just three years ago, when the state had to cut spending to contend with a projected deficit.

“What a wild roller coaster ride it’s been,” Sen. Peter Wirth, D-Santa Fe, said at Wednesday’s hearing. “What a difference it makes to be on the up slope of the roller coaster, so that’s a good thing.”

As was true last year, record-high oil output is by far the main factor driving the windfall. Technological improvements and lower costs in the Permian are putting New Mexico on track to produce almost 400 million barrels annually by next budget year, according to the projections. Remarkably, that would more than quintuple the production the state averaged between 1980 and 2010.

The revenue projections, presented to lawmakers by economists from the LFC and two state departments, would allow the state to draft a budget in the next legislative session that exceeds the $7 billion threshold passed this year.

The state also is expected to receive more money than previously anticipated for the prior and current budget years. Revenue is estimated to be $7.9 billion for fiscal year 2019, $333 million above December’s forecasts, while the state is projected to receive $347 million more than previously expected for fiscal year 2020.

Revenue will be higher for last budget year even as oil prices dropped more than $30 per barrel in the fourth quarter of 2018. That’s because New Mexico oil production is estimated to have grown 46 percent from the prior year.

The state economists pointed out that a key driver of oil revenue is the fact that Permian producers’ current break-even level, the price at which oil must be sold to cover costs, has declined to an average of $38 per barrel.

“The forecast would suggest we’re at the start of a new plateau, that looking backward is not indicative of where we’ll go in the next five years,” said Stephanie Schardin Clarke, secretary of the Department of Taxation and Revenue. “The break-even point would have to be below $38 to disincentivize continuing drilling, and we’re not anywhere near that.”

Still, the economists are urging caution.

The new estimates are “heavily dependent” on oil price and production activity, which can change without warning. A precipitous decline in oil volumes could “create a fiscal challenge far more severe than a moderate recession,” the LFC’s report said.

“Obviously, that is the big risk we’re facing as a state,” said Olivia Padilla-Jackson, secretary for the Department of Finance and Administration. “We are really at the mercy of all of these factors and that’s why we have to plan accordingly.”

Next budget year’s energy revenue could decline $1.4 billion below the current projections if oil prices and the number of active rigs were to drop, according to the report.

“Revenues significantly above trend may not be sustainable over time, and the last time New Mexico saw state revenues this high above trend was just before the Great Recession,” LFC chief economist Dawn Iglesias and economic Ismael Torres wrote in their report.

A severe drop in prices can lead companies to reduce drilling in the Permian. That happened in 2016, when the number of rigs operating in New Mexico dropped to 15 from 90 in a matter of three months.

The risks are even greater given that some forecasting agencies now see the chance of a recession in 2020 as more likely than before.

The LFC report highlighted concerns related to the U.S.-China trade war, weakening global growth and the recent inversion of the spread between the 10-year and 2-year Treasury yields.

“A global economic slowdown, exacerbated by a U.S.-China trade war, could pull the U.S. into a recession,” the economists wrote.

Reporter

Jens Erik 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.