May 16, 2019

State looks to diversify economy, rely on ‘volatile’ oil and gas revenue less

Margaret Wright

Oil pump in southeast New Mexico.

This week, Intel announced it would hire 300 more employees. Those new hires would bring the number of employees at its massive Rio Rancho plant to around 1,500, well below the peak of nearly 7,000 employees, decades ago.

Economic Development Department Secretary Alicia J. Keyes called it “good news” as the state tries to diversify its economy.

Diversifying the economy has been a rallying cry for years, as the state has increasingly been reliant on oil and gas money to balance the state budget.

If the most recent Legislative Finance Committee hearing last week is any indication, those efforts are still a work in progress.

“New Mexico is unlikely to ever have a revenue source that can make up everything we get from the oil and gas industry but that doesn’t mean we shouldn’t aim for a predictable, solid tax base that acts as a foundation for the less reliable energy industry tax revenue,” Sen. John Arthur Smith, D-Deming, wrote in the May LFC newsletter.

LFC Director David Abbey told legislators during last week’s meeting that the state has only grown more dependent on oil and gas in the last decade.

A report found that direct revenues from oil and gas rose from about 26 percent of the state’s general fund revenues to an estimated 35 percent for the current fiscal year—and that number could end up even higher by the end of this fiscal year. Abbey described it as a “volatile” revenue source.

If you include the state’s permanent funds, he said, “we’re pushing close to 50 percent of revenues coming from energy.”

This is largely due to the record amount of oil production in the state. The amount of daily oil production “increased by more than 160 percent between 2012 and 2018,” according to the LFC May 2019 newsletter.

Boon to the budget

The money flowing into the budget is welcome. The rule of thumb is that a million barrels of oil generates about $3 million for the general fund; New Mexico is projected to produce 290 million barrels of oil by July, blowing through the 250 million barrel projection in December 2018. In 2016 and 2017, the Legislature and then-Gov. Susana Martinez slashed state funding largely because of a drop in oil prices and production.

Then, when production and prices rebounded, the state saw a much better budget situation.

The most recent budget signed into law by Lujan Grisham included an 11 percent spending increase over the previous budget. But the budget also included large reserves, though not quite as large some deemed prudent.

“We can, and have, taken steps to create an adequate cushion for the inevitable downturns in the industry – with revenue reserves now at 20 percent of spending levels – but we need to do more to prevent those downturns from hitting the state so hard,” Smith said.

Another effort by the Legislature, and signed into law by Martinez, was a bill to expand a tax stabilization reserve fund by using excess oil and gas revenue to protect against future revenue downturns.

Any money from oil and natural gas taxes that exceeds the five year average of oil and gas tax collection will go into the new fund.

State efforts

Bruce Krasnow, a spokesman for the Economic Development Department, said that Keyes is “very aware of the role that [oil and gas] revenue plays in the state.”

But he said the question becomes what to do with the “spoils” from oil and gas activity.

“Now’s the time to kind of be strategic and look at these sectors that make sense for New Mexico.”

Krasnow mentioned film and TV, manufacturing, aerospace, outdoor recreation and other industries that could see a benefit from LEDA grants and job training funds.

He pointed to the Intel announcement as well as the announcement of 100 new jobs from Virgin Galactic as two of the examples of diversifying the state’s economy.

Still, the efforts won’t all be seen immediately.

“It’s a long game. You can’t just flip a switch and make it happen,” Krasnow said. “It’s a sustained effort.”