Part one of a two-part series: New Mexico’s budget is closely tied to the price of oil and gas, which can make it difficult for the state to strategically plan its spending.

New Mexico, according to the U.S. Energy Information Administration, is the third largest producer of crude oil and ninth largest producer of natural gas in the United States. In 2018, New Mexico accounted for 4% of all domestic natural gas production and, in 2019, 8% of all crude oil production. Improved fracking techniques have allowed producers in New Mexico to increase production.

The increase in the production of oil and gas is a significant factor in New Mexico’s overall economic growth. The U.S. Bureau of Economic Analysis states that New Mexico’s seasonally adjusted real gross domestic product (GDP) grew 3.7% in 2019, reaching $105 billion. The oil and gas sector contributed the most to New Mexico’s growth, accounting for 1.69% of that 3.7 figure. This means that 46% of New Mexico’s real GDP growth in 2019 was due to oil and gas, whereas all other industries combined accounted for 54%.

The oil and gas industry has, as a consequence, an outsized impact on New Mexico’s budget. The state's Legislative Finance Committee released a fact sheet on oil and natural gas revenue in 2018, revealing that the oil and gas industry contributed some $2.3 billion to the state’s general fund through various taxes, royalties and fees. Year after year, this ranges between 15% and 25% of the state’s total budget. A “rule of thumb,” according to the fact sheet, is that a “dollar increase in the per barrel price of oil translates into about $9.5 million for the general fund, while a 10 cent increase in the price per thousand cubic feet of natural gas translates into $6.5 million additional revenue.”

Though this may seem ideal when energy prices are rising, it is just as bad when they fall. The situation becomes more complicated when the state uses revenue projections based on high oil and gas prices only to see those prices drop when the budget goes into effect. And here is where New Mexico finds itself today.

Earlier this year, the New Mexico Legislature set the state’s budget. At the end of 2019, the price of West Texas Intermediate (WTI) stood at $61.14 per barrel. On Jan. 21, when the legislative session began, WTI was trading at $58.25. By the time the session ended on Feb. 20, WTI had dropped to $53.27. Using the rule of thumb previously mentioned, that $7.85 change in price resulted in a $75 million decrease in state revenue. Two months later, on April 20, the price of oil bottomed out at negative $36.98. Granted that negative figure had more to do with the nation’s storage capacity than the real value of oil, by June 1, WTI was at $35.49. That still meant a $244 million drop in state revenue from December 2019 to June 2020. Though not as dramatic, the story repeats itself  for natural gas.

Because the state’s budget is so closely tied to energy prices, volatility in the oil and gas sector makes it difficult for the state to develop strategic plans, the execution of which requires steady revenue. An example is Gov. Michelle Lujan Grisham's signature program to provide a free college education to all New Mexican students. 

When she announced the program in September 2019, many national news outlets paid attention. Not only was this great press for the governor and the state, but the financial impact was estimated to be low. New Mexico was already funding a significant percentage of college education through revenue generated by the state lottery. The governor’s proposal was a “last-dollar” program that would have paid for anything not covered by the state lottery. Its estimated cost was between $25 million and $35 million. 

However, as the legislature convened amid dropping energy prices, the governor’s proposal received a lukewarm reception. Legislators were concerned about falling revenue projections and a budget that was growing to record levels. Even with the governor’s backing, national attention and a modest price tag, the proposal fell victim to energy prices, and stalled in committee.

Since the passing of the state budget, energy prices continue to fall to such a degree that the governor called for a special session to be held on June 18. Anywhere between $1.8 billion and $2.8 billion might need to be trimmed from the original $7.6 billion budget. Year after year, it is clear that this is not the best way to set a state’s budget. True, this year is especially complicated: Energy prices were impacted by a price war between Russia and Saudi Arabia, and the pandemic further drove down energy prices and impacted sales and income tax revenue. New Mexico’s current situation, however, is not new. The state has experienced budget crunches caused by falling energy prices before. In previous years, the state has weathered the crises through austerity measures, with promises to diversify the economy. Yet this appears to be wishful thinking, since no concrete measures have been taken to make it happen. Instead of doing more of the same, we need a realistic and feasible plan to get off this roller coaster.