An old-fashioned price plunge: what does the dramatic drop in oil prices mean for state budgets?

• Author: Perez, Arturo
• Position: STATE BUDGETS

Global oil prices have plunged at break-neck speed, falling to under $50 a barrel by the start of 2015. This is more than a 50 percent drop from the high of $105 a barrel set last summer.

Crude oil prices are now at their lowest level since 2009, when weak economic conditions curtailed global consumption significantly. If gasoline prices at the pump continue to hover around $2 a gallon, as they did in early January, the average American family will save around $550 in motor fuel costs this year, according to the U.S. Energy Information Administration.

This is good news for consumers, but for states with an oil extraction industry that provides not only jobs, but revenues through severance taxes, the oil price slump is nothing to celebrate. The current glut of oil in the world market is largely the result of lower demand and greater production.

The weak economies in Europe and parts of Asia have created a slack in demand while a surge in U.S. production from new drilling technologies has added to the global oil supply. In particular, the development of shale oil deposits, such as the Bakken oil field in North Dakota and the Eagle Ford shale in Texas, have helped push U.S. oil production up to levels not seen since 1986. In addition, the Organization of the Petroleum Exporting Countries (OPEC) decided in late 2014 to maintain production levels despite the oversupply.

In Alaska, where petroleum revenue accounts for about 80 percent of the state's unrestricted revenue, the oil price slump is already having a severe impact. The state faces an estimated $3.5 billion budget gap, which is about 60 percent of the expenditures originally approved for fiscal year 2015.

With "the decline in the price at the pump smaller here than in other states," says David Teal, director of the Alaska Legislative Finance Division, "I don't see many positive effects from the decline in crude oil prices." The governor is expected to propose a new budget with significant cuts, and a large withdrawal from the state rainy day fund will likely be needed to balance the budget. Louisiana and New Mexico face similar challenges.

In Texas, the largest oil producing state in this country by far, the fall in crude oil prices has definitely captured the attention of state officials. But the state's economy, now larger and more diverse than it was during the major oil price bust of 1986, is better insulated to protect it against such blows. In the current biennial budget, for...