Oil Sticker Shock a Windfall to Energy-Rich States


Rising oil prices may be creating havoc at the gas pumps and making Wall Street jittery, but it's a boon for a handful of oil-producing states.

Crude oil prices peaked at a record $42.45 per barrel before dropping to $39.96 June 2. The recent attack against oil workers in Saudi Arabia, the No. 1 oil-producing country in the world, is making oil prices even more volatile and raising fears in the United States, the world's largest importer of oil, that higher prices could cripple a rebounding U.S. economy.

But for a handful of states, the oil sticker shock is a boost to the bottom line. "Higher prices mean the state gets more revenue," said Harold Hamm, chief executive officer of Continental Resources Inc., an Oklahoma-based oil and gas company.

The biggest U.S. oil producers, Texas and Alaska, reap a windfall, but price increases also boost business in 29 states with smaller and older depleted wells, known as stripper wells.

Higher world prices mean that private companies pay more to states in severance taxes for pumping oil found underground. States also get a take if the oil comes from federal lands within their borders. Coastal states such as Louisiana, Texas and Alabama get royalties from oil drilling in waters off their shores. Click here for a state-by-state listing of oil severance taxes from the Interstate Oil and Gas Compact Commission, which represents the governors of states producing oil and natural gas.

One reason many oil-rich states are getting wealthier is that they under-estimated the value of the oil they would tax, figuring oil would sell in the mid to high $20s, not $40 a barrel. "The price staying at the $40-a-barrel range is not something that anyone foresaw," said Chris Courtwright, principal economist for the Kansas Legislature.

That means budget crunchers are going back over their numbers and revising the estimated revenue for fiscal 2004, which for most states ends June 30, and looking cautiously ahead to fiscal 2005. Here is what some states are finding:

  • Kansas, which ranks eighth among oil-producing states, got an extra $800,000 in oil-related taxes for 2004 and estimates the 2005 budget will have an additional $2.4 million if prices stay high. 
  • Louisiana is banking on an additional $109 million in its coffers for fiscal 2005. 
  • Oklahoma figures the Sooner State will have an additional $28 million for 2005. 
  • Texas, the largest U.S. oil producer, has collected $32 million more in oil-production taxes than last year at this time.

Alaska, the country's second-largest oil producer, in 2003 collected $599 million in oil severance taxes, but several Democratic lawmakers say the state should get millions of dollars more because 11 of the last 14 oil fields to come on line since 1989 pay only a small portion of the state's 15 percent severance tax. "Alaska's oil revenue system is terribly broken," state Rep. Les Gara (D) said in a statement. Six Democrats are pressing Republican Gov. Frank Murkowski to devote a portion of the upcoming special session to overhauling the state oil tax structure.

Wyoming relies more on natural gas than oil for its coffers. The state figures every $1 price hike for a barrel of oil adds $6.1 million in state severance taxes, federal mineral royalties and corporate property taxes. Meanwhile, a dime increase in the price of natural gas adds nearly $18 million, said Jim Robinson, a senior economist at the Wyoming Department of Administration and Information. But the reverse is true too, he said. If prices drop, the state stands to lose that much money. "That's all the risk, right there. It could go either way," he said.

The hike in oil prices also affects the 29 states with stripper wells. An estimated 402,000 stripper wells produce only about 2.2 barrels a day each, but collectively account for 20 percent of total U.S. oil production, said C. Jeffrey Eshelman of the Independent Petroleum Association of America (IPAA), a Washington, D.C., trade group. That is about the same amount that the United States imports from Saudi Arabia each day, he said.

"The higher the price of oil, the more likely stripper wells can continue to produce," said oil executive Hamm, who also is president of the National Stripper Well Association, an Oklahoma-based trade group. The oil in stripper wells is harder to get. Owners actually lose money if they pump when the price of oil is $18 a barrel, according to IPAA. "Almost every state that I'm aware of has seen more revenue ... as a result of higher [oil] prices," Hamm said.

Texas has the most stripper wells, followed by Oklahoma, California, Kansas and Louisiana. States that are not traditionally considered oil-producing also have stripper wells, such as Illinois, Ohio and Pennsylvania.

But not all states are raking in big bucks from stripper wells. The added income to Kansas' coffers, for example, is not coming from stripper wells even though they make up 51 percent of Kansas' oil production. The state exempts stripper wells from its severance tax. The extra revenue will come from the 16 million barrels of oil that bigger wells are expected to yield next year, not the 17 million barrels from stripper wells, Courtwright of the Kansas Budget Office said.

Pennsylvania, which has more than 2,000 stripper wells, does not levy any tax on oil production. And Ohio sends revenue from its 5,000 stripper wells to a fund for natural resource projects, not the state general fund.

Not everyone agrees that extra revenue from oil is such a good thing. "These high oil prices pose risks for oil-producing states," said Barry Hopkins, chief infrastructure policy analyst for the Council of State Governments. "A very small handful of states will see increased revenue from higher oil prices," he said. But higher oil prices mean people will be spending more at the gas pump and buying fewer goods and services that states tax. Ultimately, higher oil prices cut economic growth, he said.

David Terry, managing director of the National Association of Energy Officials, said that states, if given a choice, would rather have lower oil prices so that consumers have "enough money to keep their jobs and keep their economy rolling" than higher oil prices even if it means extra oil-tax revenues.

Budget officials in Louisiana and Oklahoma are sticking by their respective estimates of $28- and $25-a-barrel for crude oil for next year. They figure it's better to stick with conservative projections and be pleasantly surprised with extra cash than to face budget holes if oil prices dip and tax collections drop. "We've been burned so often in the past that we're reluctant to go all the way out to the edge," said Greg Albrecht of Louisiana's legislative fiscal office.

Oil proceeds will account for between 12 and 15 percent of all of Louisiana's revenues. While that amount is up from the typical 10 percent, it's still nowhere near the 40 percent level that oil brought to the state's overall revenues during the 1970s, Albrecht said.

In Kansas, oil revenue accounts for less than 1 percent of state funds, down from 5 percent in the 1980s.

"We learned in the oil bust how quickly revenue from the energy sector can change. It was a very painful experience for Oklahoma to go through," said James Wilbanks, director of fiscal research for Oklahoma's State Finance Office.


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