Natural Gas Tax Revenue Down for Texas and Oklahoma

By BEN CASSELMAN
http://online.wsj.com/article/SB125106951994952269.html

Energy-rich states, flooded with cash last year when oil and natural-gas prices soared to record highs, are now being drained as gas prices plunged to a seven-year low Friday.

In Texas, revenue from gas-production taxes has fallen 43% from last year, costing the state more than $1 billion in lost revenue. In New Mexico, lawmakers are scrambling to close a $433 million budget gap even as they worry the gap could widen if gas prices stay low. In Oklahoma, the state government is furloughing employees and cutting school budgets.

Natural gas "is the primary driver of our state's economy," Oklahoma Treasurer Scott Meacham said. "There's not a lot you can do as a government other than manage the downturn."
In much of the U.S., falling natural-gas prices have been a rare piece of good economic news, driving down electricity costs for homeowners and businesses and promising lower heating bills this winter.

But the decline in prices to less than $3 per million British thermal units from more than $13 per million BTUs last year has reversed the fortunes of energy-producing states such as Texas, Louisiana and Wyoming.

Last year, high energy prices helped insulate those states from the national economic downturn. But as the recession worsened, demand for energy fell, dragging down prices and eroding that protection.

"The mineral sector looks like it's going to be less and less able to hold us up," said Greg Albrecht, chief economist for Louisiana's state legislature.

Across the country, states are struggling with sharply lower income from income, sales and property taxes because of the weak economy. A report by the nonpartisan Center on Budget and Policy Priorities this month found that 48 states -- all but Montana and North Dakota -- either face or have already addressed deficits for the 2010 fiscal year, just two months after it began.

Some states are still getting a boost from oil prices, which are back over $70 a barrel after falling to under $35 a barrel in December. But those gains have been more than offset by the falling price of natural gas, which accounts for more than 70% of U.S. drilling activity and in recent years has generated the majority of many states' oil and gas revenues.
The effects of lower gas prices are rippling through state economies as gas producers cut back drilling activity, causing higher unemployment, lower consumer spending and lower income-tax receipts. The Texas Workforce Commission said Friday that the state's unemployment rate had hit 7.9% in July, still below the national rate of 9.4% but up sharply from a year ago.

Oklahoma has been especially hard-hit. Tax revenue on natural-gas production, which can make up as much as 20% of the state's overall revenue when prices are high, was down 75% in July compared with July 2008, when prices were peaking. The state recently ordered all government divisions to cut their budgets by 5%, and Mr. Meacham, the state treasurer, said he expects more cuts.

The pain is extending beyond state governments to cities, schools and churches that are seeing sharply lower revenues from gas production on their land. Dallas-Fort Worth International Airport, which signed a drilling lease with Chesapeake Energy Corp. in 2006, has seen its monthly royalty revenues fall to about $1.5 million, down from nearly $5 million in September.

States are trying to hang in there. New Mexico's projected $433 million deficit for the 2010 fiscal year, which began July 1, is based on a year-long average natural-gas price of $4.30 per million British thermal units -- well above current prices.

Laird Graeser, chief economist for the New Mexico Department of Finance and Administration, said the state is still counting on natural-gas prices rebounding before the end of the year. "This is a highly speculative industry," he said.

Write to Ben Casselman at ben.casselman@wsj.com