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State expected to see hundreds of millions more in revenue as oil prices skyrocket

2 years 3 months 4 days ago Wednesday, March 09 2022 Mar 9, 2022 March 09, 2022 10:47 PM March 09, 2022 in News
Source: WBRZ

BATON ROUGE - The high cost of oil is likely to bring in hundreds of millions more in revenue than previously forecast for Louisiana during the upcoming fiscal year.

For decades, oil and gas production has been Louisiana's bread and butter, especially when it comes to the state budget. That remains true today, though not at as high a level as fifty years ago.

"You go back to the 1970s, early 1980s, in some years severance taxes and royalties [from oil and gas production] would make up 40% of the state's budget, directly," Greg Upton, an economist and professor at LSU's Center for Energy Studies, said. "Today, if you look at mineral revenues, they're somewhere in the range of 3% to 4% of the state's budget."

Even though that revenue now makes up a much smaller share, it still totals hundreds of millions of dollars each year.

Currently, as prices skyrocket, a barrel of oil costs upwards of $100, meaning the state should rake in even more.

"From the state government standpoint, I think, clearly, an increase in the oil price is going to increase the revenues for state government," Upton said.

The latest forecast, adopted by the Revenue Estimating Conference in January, anticipates the state will bring in $525.5 million in total mineral revenues for the 2023 fiscal year, which begins July 1.

That includes $407.4 million in severance taxes and $118.1 million in natural resource royalties.

For 2023, the REC estimates the state will collect $13.5 billion in taxes, licenses, and fees, meaning total mineral revenues will account for $3.8% of the budget.

That forecast is based on a barrel of oil costing $64.48, a figure well below the current price.

"What we've seen over these past several months is not only has the price of oil risen dramatically but also, futures markets are anticipating the price of oil is going to stay pretty high for the next year or so," Upton said.

Upton, who has studied how the price of oil impacts Louisiana's budget, says futures markets project a barrel of oil will cost around $97 throughout the fiscal year, leading to hundreds of millions more in revenue.

"The difference in revenues for the state associated with that price difference could be something along the order of magnitude of about $300 to $350 million in additional tax revenues that the state receives from those severance taxes over the course of the next fiscal year," Upton explained.

If that plays out, the state could collect more than $800 million in total mineral revenues for the upcoming fiscal year.

For the state's coffers, that is welcome news, but Upton warns, the high cost of oil could be a double-edged sword for Louisiana's overall economy.

That outlook, Upton adds, differs from those seen in previous decades, when the state's oil and gas footprint was much larger.

"Historically, that was definitely the case," Upton said. "Where when the oil price went up, while you had this trade-off, you get more employment in those sectors, but also, you increase costs for consumers, today that sector is smaller than it's ever been."

While certain sectors in the state might see a boost with the high cost of oil, consumers will likely face a spike in prices across the board, Upton said, which could negate some of the benefits of additional mineral revenue.

That's why Upton says the economic outlook remains ambiguous.

"When you have times where the oil price is high, and revenues are coming in, think of that as temporary revenue."

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