The cratering price of oil, sparked partly by weakening global demand amid the new coronavirus outbreak, has injected new uncertainty into Louisiana’s budgeting process as lawmakers prepare to craft the state’s $32 billion spending plan.
Depending on the lasting economic impact of the coronavirus coupled with a new price war over oil exports between top exporters Saudi Arabia and Russia, Louisiana could end up with millions fewer dollars to spend in the budget than previously thought because of the state’s heavy reliance on oil tax revenues.
Still, with tax revenues set to grow in other areas, the oil crash may not require lawmakers to make cuts. Greg Albrecht, the chief economist for the Legislative Fiscal Office, said the falling oil revenues could be offset by other tax revenues that are growing.
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“Does that change the entire revenue forecast? I don’t know that yet. It does hit mineral revenue,” Albrecht said. “But we have some other pluses that are sizable numbers. But if those stay up I'm using that buffer there to pay for that mineral weakness.”
Economists assumed oil prices would average $59 a barrel when compiling the state’s revenue forecast, but state leaders are expected to meet early next month to adopt a new revenue forecast that will determine how much money lawmakers and Gov. John Bel Edwards have to spend. The price of oil has dropped by nearly half ahead of that meeting, trading in the low $30s a barrel in recent days.
For every $1 drop in the price of oil, Albrecht said, Louisiana loses about $11 million to $12 million in direct tax revenues.
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But that drop must take place over an entire year, meaning oil prices would have to stay consistently low for a year to feel the full effects. While Albrecht noted the prices could rebound, he said he may downgrade the forecasted price of oil even further than his previous recommendations in December and January, which recommended the price be set at about $55 a barrel.
“We may be downgrading this a little more,” Albrecht said. “Now we’ve got this further shock that’s directly shocking the market as well as weakening the economy.”
The decision of where to set oil prices for budgeting purposes is made at the Revenue Estimating Conference, a panel composed of independent economist Stephen Barnes, House Speaker Clay Schexnayder, Senate President Page Cortez and Commissioner of Administration Jay Dardenne, the governor’s budget chief.
The state is required to maintain a balanced budget so the official revenue estimate effectively provides a cap on state spending.
The panel charged with officially setting the revenue estimate could not agree on a forecast in December or January on where to set the state’s revenue forecast. Albrecht and an administration economist each present a revenue forecast to the panel, which the Revenue Estimating Conference then decides which one to adopt. The Edwards administration wanted to adopt the lower of the two numbers presented to the panel, which would give the state $103 million more to spend in the budget for the upcoming fiscal year beginning July 1. Legislative leaders wanted an even lower number.
One possibility, which Edwards recently suggested may take place, is the revenue picture stays flat, instead of increasing.
“It was certainly possible and I guess still is possible that with every new set of monthly revenue figures that they would actually improve the forecast,” Edwards said after a press conference last week. “What this coronavirus thing may do is cause them to not change it at all.”
Barnes said while oil prices have crashed recently, economic changes take much longer to filter down to the state’s tax revenues than the news cycle. And he noted the state in the long-term has steadily moved away from its reliance on oil and gas revenues, and it makes up a smaller portion of the budget than it once did.
“Time will tell how long prices remain depressed,” he said. “That will determine the extent to which we see this really having a broader meaningful effect on the state’s economy.”
If oil prices remain consistently low, Louisiana could see another oil-price driven recession, which the state experienced several years ago. That crash rippled through the state’s economy with layoffs and declining tax revenues in other areas aside from direct mineral revenues.