Hey, Texplainer: I heard that oil prices are plunging – down more than 20 percent since June. Apparently Texas boomtowns aren’t yet panicking, but what does it mean for the state budget?
Texas nearly drowned in a sea of red ink after oil prices plummeted in the 1980s.
In 1987, with West Texas Intermediate oil, the U.S. benchmark, still trading below $20 per barrel, lawmakers faced one of the worst budget shortfalls in Texas history. They ultimately slashed spending and approved more than $5 billion in new taxes. At that time, oil and gas production taxes made up close to a quarter of all Texas tax revenue, making the state's budget especially vulnerable to the industry’s volatility.
This latest nosedive – to about $80 per barrel – isn’t even close to what hollowed out oil towns and the state budget in the 1980s. (The outlook then was so rough that the tiny Panhandle town of Perryton threw an epic bash after prices stayed over $20 for several days in a row.) And Texas no longer depends so heavily on short-term oil money. The state has diversified its economy and stashed away boom-time money to tap in future crises.
“It is a concern and we are watching it closely," Lauren Willis, a spokeswoman for the comptroller’s office, said of the recent oil market conditions. “However, day-to-day market volatility is less of a concern than long-term pricing trends.”
The state expects oil and gas production taxes to make up 4.5 percent of its total revenue during the 2014-15 biennium and 9.6 percent of its total tax collections, according to a Legislative Budget Board report.
Much of Texas’ oil and gas cash is staying outside the budgeting process, flowing instead to the Economic Stabilization Fund, more often called the Rainy Day Fund. In 1988 Texas voters approved a constitutional amendment that created the account – a direct response to the oil bust.
After production taxes reach 1987 levels in each budgeting cycle ($599.8 million from natural gas and $531.9 million from oil), Texas pours 75 percent of additional collections into the Rainy Day Fund, which the state's conservative leadership rarely taps. The fund also receives half of any overall budget surplus.
Texas Comptroller Susan Combs estimates the fund's balance will reach $8.1 billion by the fall of 2015, assuming voters approve Proposition 1, which is on the November ballot and would send some Rainy Day Fund money into the state’s highway fund.
Another reason why state policymakers don't need to sweat yet: Texas budget writers have relied on conservative estimates of oil prices. The current budget pegs crude oil at $82.18 per barrel, while the 2015 budget uses $80.33 per barrel. That’s around where the price is hovering now, though some experts predict it will fall to $70.
Bottom line: Though tumbling oil prices undoubtedly shrink state revenue, Texas is far less vulnerable than it once was. It has diversified its economy and has changed its budeting practices.