Oil Crisis Forces States Into Action


WASHINGTON - While dollar-a-gallon gas is a dream for the nation's drivers, $9-a-barrel oil is an all too real nightmare for oil producing states straining to recoup lost revenue.

One of them, Alaska, is facing a $1 billion budget gap thanks to the lowest oil prices since 1977. After considering and rejecting other remedies, Gov. Tony Knowles has proposed reviving the state income tax, last collected in 1980. Meanwhile, Texas, Wyoming and Oklahoma are resorting to a mixed bag of legislative actions to protect in-state oil producers and safeguard severance tax revenues that account for a significant portion of their general fund incomes.

As bad as the Oil Patch crisis is at the moment, it looks like it could get even worse.

The average December price of $8.60 a barrel for intermediate crude oil was more than 50% lower than the 10-year average price of $18.20 per barrel, according to an association of Texas oil producers. And crude oil prices continue to fall, amid concerns that a world oil glut will be worsened by an increase in exports from Iraq.

According to the Independent Oil Producers Association of America, almost 140,000 domestic oil wells have been abandoned over the past year. Daily domestic oil production is down by 360,000 barrels; over 41,000 jobs, roughly ten percent of the industry's workforce, have been eliminated in the same period.

Tax revenue from oil proceeds is critical to oil producing states' budgets. It provided 73% of Alaska's general fund revenues in Fiscal 1998. Since industry analysts don't see an upswing in prices anytime soon, state officials are scrambling to plug the gap.

Knowles' controversial plan to balance Alaska's budget hinges on a one-time appropriation of $4 billion from Alaska's Permanent Fund and a flat state tax equal to 31% of a person's federal income tax liability.

Created by a 1976 amendment to the state constitution, the Permanent Fund requires at least 25% of all oil and mineral proceeds to be saved. A percentage of the remainder is distributed to each Alaska citizen. Under the Knowles tax plan, last year's dividend of $1,540 would have allowed for an income tax deduction of about $500.

Alaska residents would be eligible to subtract one-third of the Permanent Fund Dividend from his or her state income tax.

"I believe the fairest, most progressive way to raise the additional revenue we need is an Alaska Credit Income Tax," Knowles said. "Ten percent of Alaska's wages is earned by non-residents. We can structure the income tax so an average Alaskan family of four making the median Alaska income would pay nothing."

While opponents of the plan call for increasing gas consumption and production taxes instead, industry leaders flatly reject such a move.

"There is no reason to expect a dramatic increase in the price of oil in the foreseeable future," said Richard Campbell, president of BP Exploration Inc., Alaska's largest oil company. "And it would be unwise for any company or government to rely" on that eventuality.

Speaking at Alaska's annual State of the Economy forum, Campbell said that the prospect of higher taxes on industry would discourage further development at a time when the industry is already struggling to sustain profitable production levels.

Oil rich Texas was also forced into action as a result of a year-long slide in oil prices. On February 3, Governor George W. Bush granted emergency status to a proposal to suspend severance taxes on oil production until August 31.

"It's really tough for people in the oil patch of Texas," Bush said when announcing the emergency status. "It is important for us to provide relief to the extent possible. There's a lot of people hurting."

Both the Texas Senate and House passed the tax relief package, which exempts the state's 4.6% severance tax on any oil produced from wells that bring up fewer than 15 barrels a day when the price of oil has dropped below $15 per barrel for three consecutive months.

Adjusted for inflation, prices are at their lowest ever for Texas oil, according to the state commerce department. Severance tax receipts alone have declined by $160 million from 1997 to 1998. According to the legislation's senate sponsor, 1,687 oil wells and 948 gas wells were shut down in Texas last year.

The Wyoming Senate is also considering reducing the state's oil severance tax to protect producers. Current proposals would reduce severance tax rates from 6% to 4% until the price of oil returns to $20 per barrel for three consecutive months.

The bill is an attempt to shortcut an expected $22 million shortfall in severance tax collections over two years. According to the Wyoming Budget Office, the severance tax shortfall could lead to a $128 million state deficit in the year 2000.

Wyoming Governor Jim Geringer supports the legislation, saying that the prospect of permanently losing oil wells outweighs any loss of tax income in the short term."Four percent of something is better than six percent of nothing," Geringer said.

Marathon Oil Company, the largest oil producer in Wyoming, has already cut 11% of its workforce in the past year, according to a company spokesman.

At the National Governors' Association Winter Meeting in Washington, Oklahoma Governor Frank Keating pleaded with U.S. Secretary of Energy Bill Richardson for federal help in protecting American oil producers.

Likening the plight of the U.S. oil industry to that of the steel industry, Keating framed his concerns in terms of a national security risk.

"We must become cautiously aware that we are more dependent today than ever before on the import of oil from outside our borders," Keating said. "And in some cases, we are dependent on countries that don't share our democratic views or our national interests. Yet we are beholden to their oil and therefore subject to their influences."

Keating asked that the federal government provide tangible relief to oil producers in the form of filling the national oil reserve with domestically produced oil, reducing taxes on new wells, establishing a loan program for producers, and investigating trade practices.

Richardson promised immediate action in adding to the nation's Strategic Petroleum Reserve, but noted that any tax incentives would have to gain the approval of both the White House and Congress.


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