Economists warn about reliance on oil and gas

Price fluctuations could lead to big swings in state revenue, legislators told

SANTA FE — Despite a recent drop in oil prices, New Mexico economists are leaving unchanged a revenue forecast that projects the state will have $1.1 billion in “new” money — or revenue in excess of current spending levels — available in the coming budget year.

The surge in oil drilling in southeastern New Mexico has been the driving force behind a recent state budget turnaround, with taxes and royalties levied on the industry and related economic activity boosting state revenue levels to an all-time high.

Although oil prices have gone down in recent months, oil production levels have continued to rise — with the total number of oil rigs hitting 112 this month.

“Oil producers in the Permian basin have significantly lowered break-even costs, meaning many wells can remain profitable at lower prices,” executive and legislative economists wrote in their revenue update that was presented Friday to members of the House budget committee.

However, the state’s budgetary reliance on the historically volatile oil and natural gas industries has also raised concerns among some lawmakers.

The revenue update released Friday cautioned that sudden oil price shocks could lead to big revenue swings — in either direction.

Depending on oil prices and drilling activity, the amount of revenue collected by the state could end up being $1.3 billion above or below the current projections, economists told legislators.

In addition, during the first five months of the current budget year, 89 percent of the state’s growth in gross receipts tax revenue came from two Oil Patch counties — Eddy and Lea counties — and out-of-state receipts.

Rep. Patricia Lundstrom, D-Gallup, chairwoman of the House Appropriations and Finance Committee, said a House budget plan that will be unveiled early next week will leave about 20 percent of state spending — or roughly $1.4 billion — in cash reserves and will use some of the budget surplus on road construction and improvements around the state.

“That’s a big deal to us,” Lundstrom told the Journal.

But the budget plan is also expected to include a big spending increase on public school programs statewide, in response to a landmark court ruling that New Mexico is falling short of its constitutional mandate to provide an adequate education to all students, especially Native Americans and English-language learners.

“It’s very positive there’s a shared commitment to significant targeted investment” in education, Rep. Nathan Small, D-Las Cruces, said after Friday’s meeting of the House appropriations committee.

Overall, state revenue is expected to exceed $7.4 billion in the budget year that starts in July. That would actually be down slightly from the current year, as the state is on track to take in an unprecedented $7.6 billion in revenue.