July 19, 2023

Long-term economic outlook envisions oil and gas funding dropping 

A graph showing New Mexico's long-term oil and gas production forecast. The graph is from a presentation to the Legislative Finance Committee on July 18, 2023.

A graph showing New Mexico's long-term oil and gas production forecast. The graph is from a presentation to the Legislative Finance Committee on July 18, 2023.

As New Mexico prepares for a transition away from fossil fuels, officials told the Legislative Finance Committee there may be moderate financial gains in the near future.

The state is expected to have moderate gains in the next 25 years, yet the oil and gas industry is expected to peak and decline.

Department of Finance Chief Economist Leonard Delgado discussed the state economy’s long-term outlook in one of the presentations.

The outlook said U.S. oil production is expected to peak between 2028 and 2033 followed by a decline

The decline of oil production comes during a slow global transition to electric vehicles.

The U.S. has been slower than other nations to transition to electric vehicles.

Delgado projects that the U.S. will not have a majority of electric vehicles until the mid-2030s to the 2040s.

“On the downside, EV adoption is slower. There’s some headwinds to the adoption of EVs around the charging infrastructure, as well as policies maybe not being quite as successful in terms of recycling and efficiencies,” Delgado said. “On the upside they vary those assumptions with faster EV adoption, as well as all EV constraints being solved around charging infrastructure, power supply, and policies being more successful around recycling and efficiencies. And this is a big part of the foundation for our long term outlook, as Rystad Energy data also provides.”

Rystad Energy, an energy research company with an office in Houston, completed an analysis showing the three components driving oil demand: passenger vehicles with 30 percent of global oil demand, commercial transportation with 17 percent of global oil demand and petrochemicals making up 15 percent of global oil demand.

Petrochemicals are used to make such items as plastics, packaging, clothing, electronics and tires.

Budget balancing beyond the foreseeable future

LFC Interim Director Charles Sallee and LFC Chief Economist Ismael Torres’ presentation on balancing the budget for the future included advice for long-term budgetary planning.

Sallee had three things he hoped the committee would take away from the presentation

“The first is the long term revenue outlook creates tremendous opportunities for us as a state like nothing we’ve ever seen before, but it also creates significant risk at the same time,” Sallee said. “The second is the near term decisions that you will be making from a fiscal standpoint may translate into economic prosperity or continued poverty… And finally… capital investments that actually foster economic vitality.”

The biggest fiscal improvement for fiscal year 25 was the passage of SB 26.

The bill, which Gov. Michelle Lujan signed into law, transfers excess oil and gas revenue generated through federal mineral leasing payments, to the severance tax permanent fund starting in FY 25.

The law aims to use severance funds when oil and gas revenues drop.

“Figuring out how to make changes without, frankly, resisting spinning all the recurring revenues in the near term, and continuing a balanced strategy of different investment options is something I would recommend to continue using and also using short term peak production revenues for non recurring uses,” Torres said. “Again, if you can set up a discipline process to set aside money to test new ideas and revenue streams versus pre committing us to ongoing expenses that we’re going to have down the road.”

EVs and road user fees

With the seeming inevitable decline in oil and gas revenues on the horizon, some ideas were suggested to make up for lost tax revenue from gas and diesel taxes to offset increased fuel efficiency and the expected transition to more EVs.

“Typically road fuel taxes are meant to pay for road use based or pay for maintenance based on road usage that is being decoupled based on fuel efficiency improvements and EV adoptions or gasoline tax hasn’t been updated since 1996 and diesel tax since 2004,” Michael Morrison, Interim Chief Economist, Department of Transportation said. “The New Mexico (gas) tax is 17 cents is the fifth lowest in the nation. While the diesel tax at 21 cents per gallon is the 10th lowest in the nation. Our passenger vehicle registration, while not as easy to make the same comparisons, are among the lowest in the nation. The major concerns are improvements in fuel efficiency in the adoption of EV. Now other states to mitigate this have looked at increasing the vehicle registration fees or road use charges.”

State Rep. Joy Garratt, D-Albuquerque, asked about the mentioned road use charges to which Morrison replied that NMDOT has looked at pilot programs from across the country.

“Right now they’re still in development. There are a lot of issues in terms of privacy and tracking where people are driving and how many miles have driven but that is something that we are looking at and keeping an eye on what’s going on,” Morrison said.

Garratt said that she knew that EV registration fees were being discussed although no legislation has passed as of yet.

It’s unclear when such fees would be considered, but it’s unlikely it would be soon.