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Budget Woes Continue for U.S. States That Bet on Big Oil

Though Standard and Poor’s Global Ratings recently projected a growth year for the industry in 2018, the collapse of oil prices in mid-2014 continues to haunt fossil-producing states like Louisiana and Alaska, where budget deficits—entrenched by reactive, one-off solutions—are scaring off private investors and producing serious consequences for employment rates.

The oil boom was a double-edged sword, Reuters reports, as “states that benefited from the energy boom were left reeling when prices collapsed in mid-2014, leading to a continuous scramble to make up for lost oil-related revenue.”

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Four years later, Louisiana “faces a fiscal cliff totaling roughly US$1 billion,” writes financial advisor Stephanie Kelly, “because of a sunset on temporary tax increases adopted in fiscal 2015 and fiscal 2016 and set to expire in mid-2018.”

Alaska is also in very rough shape. After growing to “depend heavily on revenues from oil activity” during the boom, the state “dealt with the sudden fiscal pressures by tapping into reserve funds and cutting spending,” a contraction that has spooked private investment.

“Less state funding doesn’t instill a lot of confidence,” said John MacKinnon, executive director of the Associated General Contractors of Alaska. And construction is one business that is feeling the pinch: citing the Institute of Social and Economic Research (ISER) at the University of Alaska Anchorage, Reuters says the public and private dollars invested in construction projects in the state have dropped more than 25% since the crash.

MacKinnon noted that “carpenters’ hours were down by 20% in 2017 versus 2016.” And the trend isn’t likely to reverse. Facing a deficit of $2.5 billion for 2019, “the state’s proposed capital budget for fiscal 2019 is US$150 million, down from nearly $2 billion in fiscal 2013, a drop of more than 90%,” the news agency states.

Compounding the problem is the state’s failure to undertake any bond borrowing since 2012, when voters approved $449.9 million in debt.

That fiduciary caution reflects an overall climate of deep uncertainty, Reuters notes. While oil prices did rebound in the last half of 2017, no government employee or analyst who spoke with the news agency anticipates a return to 2014 levels anytime soon—if ever.

“U.S. crude last clocked $61.18 per barrel,” Kelly writes, “far below the more than $100 per barrel price it hit in 2014.” That reality prompted a Fitch Ratings spokesperson to caution that “we’re going to be low for a while, and they (states) need to align their budgets to that fact.”