The Fuse

Low Oil and Gas Prices Exacerbate Louisiana’s Economic Woes

by Matt Piotrowski | March 18, 2016

States that are major oil and gas producers are seeing significant holes in their budgets in part due to low prices. One major player on this list is Louisiana, which has a long energy-rich history. The Gulf Coast state is going through a severe fiscal crisis at the moment, with lower oil and gas tax revenue a major drag. There is no end in sight: For the upcoming fiscal year, starting July 1, the state will have a shortfall that has been estimated between $750 million and $2 billion.

“What’s going on with energy prices is exacerbating longer-term structural issues that have left [Louisiana] unable to meet ongoing needs in education, in health, and other areas.”

To be sure, other states, including those that don’t produce oil and gas, are also experiencing major budget imbalances. Moreover, factors besides low energy prices have played a larger role in hurting Louisiana. “What’s going on with energy prices is exacerbating longer-term structural issues that have left the state unable to meet ongoing needs in education, in health, and other areas,” Erica Williams of the Center on Budget and Policy Priorities (CBPP) told The Fuse.

The state passed massive income tax cuts in 2007-8 that caused the deficit to balloon. The current governor, John Bel Edwards, and legislators have made spending cuts and enacted tax increases this year to try and close the budget gap, but so far measures haven’t gone far enough to rectify the situation.

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While low energy prices have not caused the current mess, the pain of the oil, gas and refining industries, which hold a unique place in the state’s economy, has had large negative effects that could take years to overcome. On the positive side, Louisiana has better economic diversity than other oil-producing states such as North Dakota and Alaska. The oil and gas industries, along with other mineral activities, make up 10 percent of the state’s GDP, and their tax revenues are 9 percent of Louisiana’s total, according to data from the Rockefeller Institute. By contrast, Alaska relies on the industry for 72 percent of its taxes. Louisiana is also helped by the fact that it has a large number of refineries. The state’s refining industry, whose capacity makes up a fifth of the country’s total, has not been hit as hard as producers since the spread between oil and refined products has remained elevated and companies are profitable.

Economic woes

The state’s employment situation has been volatile. Unlike the national average, which has fallen sharply since 2010 to under 5 percent, Louisiana’s conditions have gone from good to bad, and the outlook has no clear direction. The unemployment rate rose throughout 2014, peaking at 7 percent in November of that year as some 37,000 lost their jobs. Louisiana’s unemployment rate has improved since then, albeit slightly, and is now 1 percentage point above the national average.

Louisiana’s employment situation has been volatile. Unlike the national average, which has fallen sharply since 2010, Louisiana’s conditions have gone from good to bad, and the outlook has no clear direction.

As noted earlier, Louisiana is not the only U.S. state with a robust energy industry getting slammed during the current downturn in prices. The Rockefeller Institute says that in 2015, employment fell in six of the eight top oil and gas producing states, while tax revenue dropped by 3.2 percent on average in all of them. By contrast, the other 42 states saw growth in tax revenues of 6.5 percent. In the Houma-Thibodaux metropolitan area, a part of Louisiana where oil and gas are a big employer, the unemployment rate averaged 6 percent for a couple of months last year, according to the Bureau of Labor and Statistics, after falling as low as 3.8 percent in April 2014. In fact, in the past couple of years, the number of unemployed there has risen by 2,000 people, or 55 percent.

The area’s vulnerability is particularly acute and will continue as long as energy prices remain low: Houma-Thibodaux’s income and tax collections rely primarily on offshore oil and gas operations.

“There is no other place in the state of Louisiana, very few in the United States that has a closer contact with the oil and gas industry than this one,” said economist Loren Scott, who has put together studies commissioned by the Louisiana Mid-Continent Oil and Gas Association, a local trade group.

It’s not just workers directly hired by oil and gas companies and state taxes that are important; property taxes and industries that service the oil and gas sector also benefit local economies. According to a 2014 study by Scott: Based on direct impact and multiplier effects, the oil, gas and refining industries backed $73.8 billion in sales for companies operating in the state, generated over $20.5 billion in household earnings, and supported 287,008 jobs in 2011.

Production declines

While Louisiana ranks among the top state producers, it has seen ongoing structural declines in onshore production for decades. In 2015, crude oil production in the state averaged only 173,000 barrels per day, or just 1.8 percent of the country’s total, down from 1.5 million barrels per day (mbd) in 1970.

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However, when resources from the Outer Continental Shelf are included, total output averaged 1.33 mbd last year. Though the level has fluctuated over decades, current levels are down considerably from the 2.58 mbd peak in 1971, and 1.68 mbd at the end of last decade, based on data from Louisiana’s Department of Resources.

While Louisiana ranks among the top state producers, it has seen ongoing structural declines in onshore production for decades.

In 2005, the industry was tested after Hurricanes Rita and Katrina devastated the state’s infrastructure, which hasn’t fully recovered from the two historic storms. In 2010, Louisiana’s offshore business took a hit after the BP Macondo spill, which slowed down exploration and production. Moreover, it has not benefited from the shale oil boom like North Dakota, or its neighbor Texas.

The gas industry received a bump from shale, with the most productive area being the Haynesville play, but natural gas production is declining too. Onshore gas production rebounded considerably from 2009-11, but has fallen from its monthly peak of 9 million cubic feet per day to current levels of around 5.3 million cubic feet per day. When federal offshore output is included, the total is higher at 7.53 million cubic feet per day, making it the second largest producer after Texas.

Where does the state go from here?

Whether the oil and gas industry sees a higher tax burden to help fill the budget gap remains to be seen.

The health of Louisiana’s oil and gas industry will in large part depend on the outlook for prices, but it’s unclear whether oil or gas can rebound significantly in the current environment of oversupply. A prolonged state of low prices could continue to negatively affect the employment situation. One thing is certain regarding the health of the state’s budget: There will be more pain on both spending and taxes to close fiscal shortfalls. Whether the oil and gas industry sees a higher tax burden remains to be seen.

The state’s industry will obviously fight any increase in taxes. “With the price of oil hovering around $30 a barrel and natural gas pricing continuing to remain depressed, our industry has had to make some really difficult decisions,” said Chris John, the president of the Louisiana Mid-Continent Oil and Gas Association, in February. “The idea that taxing the industry will have little impact to companies’ decisions to do business in Louisiana is a complete falsehood. In these rough times, industries need a stable, predictable regime that will foster a comeback.”

But given how dire the budget situation is, rescinding tax breaks for the state’s oil and gas companies could end up on the table.

“The state government may end up taking a closer look at the billions of dollars it gives in tax breaks in order to raise money,” CBPP’s Williams told The Fuse. “They haven’t gotten to the energy sector yet. It depends on how far they are willing to go to plug the gap.”

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