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High oil prices good for Texas budget

By April Castro

Associated Press

Published: Wednesday, March 30 2011 2:34 p.m. MDT

AUSTIN, Texas — Higher oil prices may make consumers miserable, but unrest in the Middle East could mean billions of dollars in tax revenue for Texas' tight budget.

The money is coming from Texas oil producers who have increased their rig counts to take advantage of prices that spiked in mid-February, when fighting in Libya squeezed off shipments that had supplied nearly 2 percent of the world's oil.

A percentage of the price from every barrel of oil produced in the state — now fetching about $104 each — goes into the state's Economic Stabilization Fund, commonly known as the Rainy Day Fund.

It's way too early to know how big the fund will get or whether the Legislature will overcome political opposition to using it. The Texas House will take up a proposal Thursday to tap the Rainy Day Fund to pay off $3.2 billion in state debt due in August.

But most experts agree: the fund will get bigger than current projections. A lot bigger. Based on an estimate of oil at $70 per barrel, the state comptroller forecast a $9.4 billion balance in the fund at the end of the next budget period. Prices have been well above that since last summer.

Stuart Greenfield, an economist and former revenue estimator who worked for three Texas comptrollers, has studied the numbers and predicts the fund could reach $11.6 billion if left untouched and prices stay high.

"If they take $3 billion out of it, they're still going to have a pile of money," said Greenfield, who now teaches economics at Austin Community College.

House leaders say that is probably the most the fiscally conservative body is willing to spend. The Senate is looking to tap more than that, setting up a budgetary battle between the two chambers.

Analysts have mixed expectations for how long high oil prices can be sustained.

Amrita Sen, an oil analyst for Barclays Capital, says prices are likely to stay high for a while. That's because fundamental market variables — like demand — have remained strong while unrest plagues oil-producing countries.

"The fundamentals were strong. If they weren't ... we wouldn't have seen this reaction," Sen said. "It's a combination of those two that's leading to prices being at current levels."

She said upcoming elections in Nigeria and simmering tensions in Bahrain could keep prices high, even if Libya begins exporting oil again. But with gas prices approaching $4 a gallon, demand could take a hit before the start of the summer driving season.

"These markets move on a dime," said Billy Hamilton, a former state revenue estimator who spent decades in the Texas comptroller's office. Even though Hamilton said the fund balance will likely be higher than predicted, he said years of watching the oil market have taught him to use caution.

"People always say 'this time it's all going to go up and it's never going to come down,' but it does tend to come down."

Even so, for lawmakers writing the next two-year state budget, the money isn't there until Comptroller Susan Combs says it's there. So far, she's sticking with the $9.4 billion estimate she made in January, a report that included a prescient caveat.

"If the price of oil, however, were to rise and remain above $100 per barrel, the near-term implications could be positive for the state," she wrote. "In the longer-term ... businesses and households would be burdened by increasing prices."

Led by Gov. Rick Perry, fiscal conservatives say they want to keep enough money in the fund to help the state in the event of a hurricane or other emergency.

But moderates and liberals say with a revenue shortfall that could reach as high as $27 billion when counting for population growth, the reserve fund is needed to keep schools, nursing homes and other state programs operating.

The Rainy Day Fund was created by a constitutional amendment in 1987. Supporters included Perry, who was then a conservative West Texas Democrat and a rising political star.

At the time, Texas was more dependent on oil and gas revenue. Decreased energy prices coupled with cost pressures from education, prisons and Medicaid pushed the Legislature to expand the sales tax that year.

"You can't just go out and pass a tax bill every time you need a little bit of money," said former Rep. Stan Schlueter, who wrote the legislation in 1987 after two failed attempts in 1983 and 1985. "My intent was to smooth out the ups and downs of the economy or take care of an emergency situation.

"Once we passed it, it's up to each Legislature to decide (how to use the money). It's not for me to determine."

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