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Oil Price Crash Crushes New Mexico’s Budget

New Mexico’s high dependence on oil and gas leases, taxes, and royalty payments are threatening the fiscal stability of the state as the oil price collapse has shown the vulnerability of the current state budget revenues, the Institute for Energy Economics and Financial Analysis (IEEFA) said in a new report on Tuesday.  

New Mexico’s original budget for fiscal year 2020 was set at US$7.1 billion, with 25.9 percent of the revenue in support of that budget expected to come from oil and gas leases, royalties, and taxes. In FY 2019, New Mexico’s operating budget had an even higher percentage of oil and gas revenues—30 percent, Tom Sanzillo, Director of Finance, and Suzanne Mattei, Energy Policy Analyst, at IEEFA, said in the report.

The price crash from earlier this year left New Mexico’s budget short. Faced with a steep decline in revenues year over year in FY 2020, the governor and legislature in June reduced the initial FY 2021 budget of US$7.6 billion by around US$415 million, IEEFA said.

“Even in its most optimistic scenario, the New Mexico Legislative Finance Committee puts the average price of oil at only $43.50/bbl through fiscal year 2022,” Sanzillo, the study’s co-author, said in a statement.

“It’s an improvement over the historic lows hit in April 2020, but still far below what’s needed to return New Mexico to robust fiscal health. The situation is unlikely to improve anytime soon.”

Given the fundamental changes in the energy markets and the prospects of a long-term decline, New Mexico’s reliance on oil and gas revenues is a risky bet, the study noted.

Related: Three Energy Stocks To Watch On Election Day

“To protect its fiscal future, New Mexico must take strong action now to establish a more sustainable, reliable revenue base,” IEEFA said.

The oil industry in New Mexico may have to contend with another, immediate, headwind if Joe Biden wins the presidential election next month. Biden has promised to immediately ban new fracking on federal lands, which has oil workers in New Mexico fearing they might lose their jobs while oil companies rush to secure drilling permits on federal lands.

Fracking on federal land is just 10 percent of the total U.S. fracking industry, but for New Mexico, it’s much more—65 percent of the state’s oil and gas production takes place on federal land, according to Reuters estimates. 

By Charles Kennedy for Oilprice.com

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