Yesterday, on the way to documenting the malaise China’s hard landing has inflicted on Minnesota’s mining country, we discussed the dramatic impact falling crude prices have had on the American and Canadian oil patches.
Take Texas, for instance, where a year of crude carnage has wreaked havoc upon what, until last year anyway, was the engine driving the “robust” US labor market. As we showed in November, layoffs in Lone Star land far outrun job losses in any other state. In Houston (which was already staring down a worsening pension crisis), vacant office space is “piling up.” As WSJ wrote last week, “the amount of sublease space on the market in the Houston area hit 7.6 million square feet, or the size of more than two Empire State Buildings.”
“The unemployment rate in Texas rose sharply to 9.2% in 1986, an all-time high for the state,” Goldman wrote recently, recalling a previous period of low oil prices in a note entitled “How Bad Can Texas Get?”
“Real house prices fell 30% peak to trough, and the number of bankruptcy filings (including both business and non-business filings) more than doubled from 1984 to 1986,” the bank added.
North of the border, things are even worse. As regular readers are no doubt aware, Alberta is a veritable nightmare as suicide rates rise, the number of jobless multiplies, food bank usage soars, and property crime in Calgary spikes.
“Lower for longer” has been a disaster for many state and local governments in the US, as revenue projections devised before oil’s historic plunge prove increasingly optimistic.
Take Louisiana for example, where Lt. Gov. Jay Dardenne recently announced that the state is facing a $750 million deficit. “Many people are probably wondering how this is possible, given legislators met just six weeks ago to approve a plan to close a nearly $500 million gap that was projected by state analysts,” The Times-Picayune wrote in late December. “Dardenne said he found the number ‘shocking,’ but said it was the state's best guess at how short on cash the state will be by the end of the fiscal year given several projections that showed things are worse than previously thought.”
Louisiana officials had assumed oil prices around $62 a barrel when calculating projected tax revenue. Needless to say, their projections were slightly off the mark.
Meanwhile, in Alaska, Governor Bill Walker is looking at a $3.5 billion deficit, prompting the state to consider implementing an income tax for the first time in three decades. The new tax would generate about $200 million, based on estimates provided by Walker's office. “Another of Walker's proposals, unveiled in November, would divert some of the money from the state's oil wealth investment fund, or Permanent Fund, which generates the annual payout based on earnings, toward financing state government,” Reuters reported in December. “This year, about 645,000 Alaskans received a Permanent Fund Dividend check for $2,072. A new calculation formula would cut that to about $1,000.”
"If we do nothing, we will empty our savings in the constitutional budget reserve, then we will have to tap into the earnings reserve - which means that in five years, Alaskans would no longer get dividends," Office of Management and Budget Director Pat Pitney said.
And then there’s North Dakota which, as Bloomberg recalls, “has been the economic envy of every state in America for most of the past decade.”
“It posted the lowest jobless rate, the highest increase in personal income, and the fastest-growing population—all thanks to an historic oil boom that vaulted it past Alaska to become the country’s second-largest producer after Texas,” Bloomberg continues. “Now, amid the worst bust in a generation, North Dakota’s economy is shrinking, employment is falling fast, and the state is imposing the deepest spending cuts in its history to help plug a $1 billion budget deficit.” Here’s more:
With crude prices at 13-year lows, Republican Governor Jack Dalrymple on Feb. 1 ordered 73 state agencies to make 4 percent across-the-board cuts. Patching the deficit, which comes after years of surpluses, will require officials to take $500 million out of a rainy-day fund, leaving it with only $75 million for emergencies. Dalrymple is only the third governor in the state’s 127-year history to dip into the fund.
When state officials were drafting their budget a year ago, they assumed oil prices would range from $47 to $53 a barrel, which they thought was sufficiently pessimistic to cover them against further drops. They were not pessimistic enough. “We never would have guessed it would get down to $28 a barrel,” says Pam Sharp, the state’s budget director.
Taxes on oil production account for only about 5 percent of total state revenue, says David Flynn, chair of the economics and finance department at the University of North Dakota. The real money comes from sales tax revenue, the bulk of which is derived from the sale of equipment and services related to fracking, says Sharp. With prices down, roughly 1,000 wells that have been drilled but not fracked are sitting idle, awaiting the market’s recovery. As a result, the state’s sales tax revenue fell by a fourth during the third quarter of 2015 from the same period in 2014. “Sales tax revenue alone is down $700 million from the original forecast,” says Sharp.
According to data from the Bureau of Economic Analysis, North Dakota’s economy shrank 10.4 percent in the first quarter of 2015 and 1.2 percent during the second quarter.
And there's no respite in the cards.
Storage is overflowing, OPEC is splintered as Saudi Arabia remains generally belligerent on the idea of production cuts and Iran is reluctant to start talking about curtailing supply just as the country is attempting to ramp production back up after years spent languishing under international sanctions.
On the bright side for North Dakota, whose economy has "quite simply been devastated by the dramatic drop in oil prices" (to quote IHS economist Karl Kuykendall), at least no one can take away their new and improved roads.
"So much oil money went to road improvements," one resident told Bloomberg. "That’s definitely a quality-of-life improvement that will last beyond the boom.”
And with cheap gas, North Dakotans can drive on them all day long.
See, there's always a silver lining.