State Senate Finance Committee chairman John Arthur Smith was among the many New Mexicans who watched oil prices plummet to unprecedented numbers, as a glut of oil and a precipitous drop in demand sent prices into negative territory for West Texas Intermediate.
Smith said he saw oil prices dropping Sunday night, before dropping to $10 when he saw the news Monday morning, then even further as he started his workday. By the end of trading, WTI was trading for -$30 per barrel. In other words, traders would pay people $30 to take their supply.
“I’ve just never seen anything like it,” he said. “And quite frankly, I don’t know what it means.”
Smith isn’t alone. It is the first time that WTI has traded at a negative price. It’s because the world is running out of room to store crude oil.
It could end up with hundreds of oil and gas companies declaring bankruptcy, CNN reported.
It also means the New Mexico Legislature will have its work cut out for it when it meets for a special session, which Smith predicted would come in June.
Smith said the state might be able to last through the current fiscal year, which runs until the end of June, but would need to make significant changes for the next year’s budget, which begins July 1.
The state was projected to have $1.7 billion in reserves at the end of the current budget year.
“There’s going to have to be some very tough decisions to be made,” Smith said.
It might not happen in the special session, but Smith said, “Quite frankly, the time for revenue reform, I’m not calling it tax reform, is going to be now.”
Oil and gas makes up a hefty percentage of the state budget, in both direct and indirect ways. Directly, the state gets funding through various severance taxes, contributing to the general fund, schools and more. Also, when oil is booming, workers and others contribute to the state’s gross receipts tax, which imposes a tax on most goods and services in the state, as well as personal income tax.
He also said it would likely be a worse budget situation than a decade ago, when the Legislature grappled with the Great Recession from 2007 to 2009.
One thing to watch is further federal action. The CARES Act, a coronavirus relief bill passed by Congress, had funding for states, but it can only be used for COVID-19 response. Smith also said he hoped for more flexibility from federal money to states.
The impact of COVID-19 goes beyond just oil and gas prices, Smith said, pointing to budget problems faced by cities.
“The shutdown of retail in the state, we’ve got cities that have huge problems developing,” Smith said. “They live off of gross receipts. We don’t have a complete read on that one.”
On Monday, Santa Fe Mayor Alan Webber said that because of GRT problems, the city could be facing a $46 million revenue shortfall, according to the Santa Fe Reporter. Webber’s online discussion came ahead of a City Finance Committee meeting on Monday night. The city will freeze hiring and spending for all city departments except for essential services. It will also seek to save money on cutting other budget items.
The City of Albuquerque is also facing a ‘brutal’ impact from COVID-19, the city’s chief financial officer said this weekend.
Other cities are likely to be impacted as well, particularly those in southeastern New Mexico, the heart of New Mexico’s oil and gas industry.
