KRWG

Erickson: New Mexico Legislators Should Invest Oil Boon In Building Our Future

Dec 16, 2018

Commentary: New Mexico has received a very large present from the oil patch. And when it was unwrapped, what was found was a $1.2 billion surplus. But state budgeteers are playing the role of Grinch.

The wide spread adoption of fracking in eastern New Mexico coupled with higher prices has resulted in a sharp increase in oil patch dollars, hence, tax revenue. But the Grinch/budgeteers warn that what the oil market giveth can be taken away, so argue for caution in spending our new-found wealth.

Many, and by many, I mean me, think budget technocrats too pessimistic. Certainly, oil prices will fall in the future; just as certainly they will rise. Oil markets are volatile, and nothing has happened to change that. But, and this is a big but, there has been a fundamental shift up in the energy market. For any given price, New Mexico oil production will be more than in the past.

The amount of oil and gas in the Permian is essentially unlimited. A recently released assessment by the Geological Survey identified new reserves under Lea and Eddy county sufficient to ensure that New Mexico has enough oil and gas to sustain production for decades to come. The Delaware Basin, part of the larger Permian Basin, is now estimated to contain an estimated 46 billion barrels of oil, 281 trillion cubic feet of natural gas and 20 billion barrels of natural gas liquids.

Meanwhile, for the first time in decades, for the week ending November 30, the United States became a net oil exporter, exporting 9 million barrels/day while importing only 8.8 million barrels/day. The US is expected to become a permanent net exporter by 2020. This is in large part thanks to New Mexico production.

In the past, that the oil would one day run out had been the justification for the establishment of the Land Grant and Severance Tax Permanent funds. Legislators have been reluctant to tap these for current expenditures arguing the need to keep them safe for future generations. But now new technology and large reserves means that this years’ state budget surplus is likely be more the norm than the exception going forward.

Given the new reality, the argument for not tapping the permanent funds to finance long term projects that could contribute to the current needs of New Mexican citizens has lost a lot of its validity. The obvious unmet current need is to finance preK-12 education.

If oil prices fall, oil production will decline; if oil prices increase, production will increase. But thanks to fracking coupled with increased servers, the highs will be higher, and the lows will be less low. Oil revenue going forward will be just as volatile as before, but at a higher average level. Legislators will be well served to keep this in mind in deciding to spend or not spend this year’s surplus.

The biggest risk facing New Mexico oil is not the fear of running out, but rather the end of hydrocarbon economy. Climate change is now sufficiently obvious that countries will adopt policies to move away from carbon. At the same time, technology has improved so that wind and especially solar are becoming a viable alternative. The global dependence of oil could well to end before New Mexico runs out of oil.

Christopher A. Erickson, Ph.D., is a professor of economics at NMSU. He has studied the New Mexico economy for more than three decades. The opinions expressed may not be shared by the regents and administration of NMSU. Chris can be reached at chrerick@nmsu.edu.