Will the CoronaVirus, Oil & Gas Price Declines Impact the Texas State Budget?

Texas, other oil states, brace for collateral damage from oil price war and coronavirus

AUSTIN, Texas (Texas Insider Report) — “Behind all this is the economic impact of the CoronaVirus, which is still uncertain. We can’t look at the impact of a drop in oil and gas prices on Texas in a vacuum, but the consequences for Texas of the drop in prices will depend on two questions: 1.) How low, and 2.) How long,” says the Texas Taxpayers & Research Association's (TTARA) president Dale Craymer (right.)

Oil and gas prices have plummeted recently to their lowest levels in decades after Saudi Arabia declared a price war on Russia earlier this month — and they have continued to fall throughout the past week over concerns about the CoronaVirus, adding further stress to financial markets that were already reeling .

The last time oil plunged so far or so fast was during a two-year rout that began in 2014, and the impact cascaded all across the energy-dependent regions of the nation. When oil and gas production slows in Texas, employment and tax revenues decline and budget cuts often follow at the State & Local levels.

Craymer estimates that Texas loses approximately $85 million per year in tax revenue for every $1 decrease in oil and gas prices.

Texas Comptroller Glenn Hegar (below right,) the state’s chief revenue estimator, predicted last year that oil prices would hover in the low-to-mid-$50 per barrel range through the latter half of 2021 — and Texas' two-year budget was built on that assumption. Prices last Friday were down 40% from the bottom end of that range.

But as prices have continued to plummet, Hegar continued to temper against any economic panic:

“The fundamentals of the Texas economy remain strong. We are still only six months into the current budget cycle and its too early to tell with certainty how current fluctuations will impact long-term economic performance and state revenues.

“Texas has exposure if oil prices remain depressed for a sustained period of time, however. And a slowdown in economic activity related to the COVID-19 outbreak could be a headwind,” he said, adding that he will be closely monitoring the situation.

“State leadership has numerous financial management tools which allow the state to react to, and contend with, economic pressures,” Hegar said.

If Russia agrees to production cuts, and if the COVID-19 virus is curtailed through the hot summer months, Hegar seemed to be saying Texas’ coffers could recover before lawmakers return to write the next state budget in 2021.

The TTARA's Craymer also notes that the state has some cushion: The last State Budget was balanced with $2.9 billion to spare. And, Texas has somewhere around $8 billion in its Economic Stabilization (ESF) Rainy Day Fund — though state lawmakers set a $7.5 billion minimum fund balance for future legislatures as a sign of their bullishness on the economy.

While many experts say Texas is better positioned to handle an oil and gas price collapse today than it has been previous years due to a diversified economy, there are already significant demand disruption going on from the CoronaVirus.

The 2014 collapse in oil prices forced the industry to cut costs and otherwise become more efficient, but the COVID-19 virus throws an unprecedented economic variable into the mix.

While it may be too soon to tell the degree to which the Texas Sate Budget will be impacted prior to the 2021 Legislative Session, state revenue forecasters are required to give state agencies budgetary guidance in June as part of the state's budget process while legislators are not in session.

If things don’t improve, agencies may be told to start cutting in their current budgets in anticipation of further downturns in state revenues.

While Texas’ economy and budget are highly sensitive to oil and gas prices as the nation’s top producing state, economic and energy experts and state officials said last week it’s too early to predict exactly how big an economic hit the state will take. That will depend on how long both the Saudi-Russia deadlock and the COVID-19 outbreak persist.