Realizing the benefits of a stronger economy, Oklahoma is projected to have a $612 million surplus heading into next year’s budget, the State Board of Equalization reported this week. The board certified a record $8.2 billion in revenue available for lawmakers next year, representing an 8 percent increase over FY-2019 levels.
Like all Oklahomans, we are encouraged by the growing strength of Oklahoma’s economy and especially proud of the important role our industry plays in creating and supporting good paying jobs across the state.
But lawmakers must exercise caution as the new legislative session kicks off and budget negotiations get under way. Oklahoma is still far too reliant on revenue generation from one industry. As we’ve said before, policymakers should find ways to further diversify Oklahoma’s tax base – not increase taxes and reliance on a single industry – to better weather the volatile commodity price swings that are common in the industry.
Looking ahead to the FY-2020 budget, dependence on the oil and natural gas industry for so much of the projected revenue is cause for concern. The proposed budget calculates revenue streams based on the price of oil trading around $55 per barrel. Recently, oil has been trading sub-$50, approximately 11 percent lower than budget projections. Natural gas prices, too, have slid almost 20% in recent weeks.
The recent commodity tumble is grabbing investor attention, as CNBC reported: “America’s top oil-producing region has a new problem: $40 crude.”
Let’s not forget that just a month ago, in October, crude oil traded in the mid-$70, which was one of the key drivers of record state tax revenue collections.
As OIPA-OKOGA president Chad Warmington has written before, “it’s unwise to assume that current levels of production, employment and drilling will sustain themselves indefinitely into the future.”
The ebbs and flows of commodity prices are a part of doing business as an oil and natural gas producer. … It’s not just oil and natural gas producers who feel the pinch when prices fall. The working Oklahomans who work in our state’s historic oil fields – one out of every six Oklahoma employees – are the first to see the impact as drilling slows. The economic impact ripples throughout Oklahoma’s economy with fewer trips to the convenience store, fewer hotel rooms occupied and fewer seats filled at the local diner.
That decrease in economic activity serves as a double whammy for state coffers. Already impacted by gross production tax collections that follow the ups and downs of commodity prices, the reduction in sales tax, income tax and corporate tax collections compounds the issue for a state budget built on the oil and natural gas industry.
The Oklahoma economy continues to benefit from the strength in its defining industry. It is unwise, however, to assume that current levels of production, employment and drilling will sustain themselves indefinitely into the future thanks to an ever-volatile commodity market. Policymakers should begin to focus now on practices that will help the state manage the economic cycles that surely lie ahead.
The oil and natural gas industry will continue to do its part in creating more Oklahoma jobs through increased production. But a continued reliance on a single industry to plan our state’s budget is risky business and threatens to reverse the economic growth we have experienced over the last year.