How low can it go?
That’s the question on the minds of those dependent on oil markets. And that question has particularly profound implications for the state of Louisiana, even going beyond the importance of the state budget’s current difficulties with the plunge in oil prices.
A rule of thumb is that the state loses $12 million in severance and other taxes for every dollar drop, and a barrel has dropped a lot of dollars. Some alarmists are talking about $35 per barrel, which would be an immense gap between the price as late as June. Since then, oil is down nearly 40 percent. Any lower is a marvel.
The obvious local implications of oil prices are in Lafayette, a national center for oilfield services, although service companies are distributed across the state.
But it also is a question mark for the two regions of the state that are big consumers of energy: petrochemical manufacturers along the Mississippi and Calcasieu rivers. Lower oil prices may make, at least in the short term, some of the big petrochemical expansions less competitive in markets, because of the low price of natural gas, a competing energy source.
Overall, it’s quite likely that the oil plunge isn’t going so far south that it will endanger industrial development projects that have been announced along both rivers this year.
By and large, companies are looking far beyond today’s volatile energy market and ahead toward customers they will serve a decade or more from now.
For one thing, the decline in oil prices is driven by an oversupply. But it is not purely a matter of the fracking revolution generating oil and gas from America’s resurgent oil fields.
That contributes to the current oversupply but a large portion of it is attributable to slow growth or even outright recession in some major nations, including Japan and European countries, but also the slower-growing economy of mainland China.
As David Wessel writes for the Brookings Institution, low oil prices are bad for petroleum producers, good guys like our neighbors in Mexico, and well, us, too. But it’s also bad news for some bad actors in the international arena, including Russia, where the ruble is tumbling with oil prices.
For most other places, including most U.S. states that consume energy, the drop in oil prices amounts to “a big tax cut,” Wessel said. “It gives consumers more money to spend on other things and reduces the cost of production for business.”
He cited several analysts who see a decline in oil prices as contributing to U.S. growth significantly, so Louisiana certainly does benefit to some extent.
Yet our state remains an energy state, one that benefits significantly from literally fueling the nation’s economy and filling its gas tanks.
Such a dramatic price drop might have some positives at the pump for everyone in Louisiana, but the old saying is that whatever hits the fan is never distributed evenly. So it is for Louisiana and the, unfortunately, falling price of oil.