New Mexico’s oil and gas revenues are breaking records and complicating budgets – New Mexico Political Report

Oil and gas revenues addedmore than $1.7 billion to New Mexico coffers in the first four months of the year more than in any other four-month period in state history.

A lot more.

Records compiled by the New Mexico Tax and Revenue Department show that year-on-year, revenues from January through April more than doubled from $782 million in 2021 itself a record year. (Records lag by two months to allow producers time to report their production numbers.) This money gusher comes from increasing production in New Mexicos portion of the Permian Basin currently themost productive oilfieldon the planet and skyrocketing oil and gas prices brought on by the Russian invasion of Ukraine.

This story is by Capital & Main and is republished with permission.

State Sen. George Muoz (D-Gallup), vice chair of the powerful Legislative Finance Committee, says that committee economists peg the states likely take from oil and gas at $5.2 billion for the fiscal year roughly a billion more than last years oil and gas revenue. That tally may rise if world oil prices remain high.

Mountains of money are generally a good thing for anyone, but the unplanned windfall does come with complications. The first is thekindof money brought in by oil and gas production. Roughly speaking, state government views revenues in two ways: as one-time or recurring income. Recurring money remains fairly steady year after year. For example, people will generally remain employed and use their earnings to buy things, making income and sales taxes a reliable source of steady, recurring revenue for the state.However, record-breaking fossil fuel revenue is treated as one-time money: It cant be counted on to repeat, so it cant be used to create new programs, add permanent jobs or increase pay for state employees across the board. One-time money can build police stations and water treatment plants and schools, but it cant pay the people to fill them. And that makes budgeting difficult. When you have that one-time money surpassing recurring money, it becomes a little topsy-turvy, Muoz says. And he says that his committees economists are predicting that that is exactly what is about to happen.

The second problem stems from the first: This is oil money, and oil money has a roller-coaster history and a murky, finite future.

I have ridden the roller coaster, Muoz says. I came in in [2009] where we had to cut a billion dollars out of the budget because fossil fuel production had tanked during the Great Recession. Its not something he wants to do again.

Kelly ODonnell, a New Mexico economist who keeps tabs on the oil and gas industry, agrees that this isnt the states first boom year but that history rarely serves as a guide. New Mexico has had a tendency towards selective amnesia about these things, she says. We are always surprised when the bad times show up. Yet they always do.

To progress economically, over time, we are going to have to get out of this boom-bust resource cycle, she says. When it goes down next time, it may not come back up, and we have to be prepared for that reality.

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New Mexico sits atop half ofthe Delaware Basin, the most lucrative portion of the greater Permian Basin, and the states fossil fuel production continues to grow. New Mexico was the first state to return to and then exceed pre-pandemic oil production levels earlier this year after they cratered in early 2020 as the planet closed down in the face of COVID-19. Nationally, only Texas and the offshore fields in the Gulf of Mexicoproduce more oil.

The Tax and Revenue Departments figures do not account for all oil and gas revenues collected by the state they dont include revenue from federal mineral leases, for example but they do reflect how much is coming in. The total is calculated during the states fiscal year, which runs from July 1 to June 30 of the following year.

And while oil and gas revenues tallied by Tax and Revenue for the full 2022 fiscal year wont be known for another two months due to the reporting lag, they are already nearly double all of last years take: $3.6 billion this year compared to nearly $2 billion last fiscal year.

A large chunk of the oil and gas tax bonanza will go to long-term economic and social investment, primarily theEarly Childhood Trust Fund. Set up in 2020, the fund invests in the health and education of the states toddlers, with an eye on their and the states future development. If we invest in our people, if we have the workforce ready to attract employers, if we have the schools ready to attract employers over the long term that will improve our situation, says State Rep. Matthew McQueen (D-Galisteo), chair of the House Energy, Environment and Natural Resources committee.McQueen also argues that the windfall should be used to cap abandoned oil and gas wells. We should do that while the money is flowing, he says. When its not flowing, the state can get left holding the bag. And he says that maybe even a higher priority is hiring more oil and gasfield inspectorsat the Oil Conservation Division and Environment Department to find leaks and prosecute offenders. The reason you cap abandoned wells is because of the methane leaks, right? Theyre tied together, he says. But hiring inspectors for more than a year requires long-term funding, not a one-time windfall.

Funding additional oversight programs and positions is unfortunately not ultimately up to the executive, says Nora Meyers Sackett, press secretary to Gov. Michelle Lujan Grisham. Last year the administration proposed funding for additional regulatory staff at both [the Oil Conservation Division and Environment Department] that were not funded by the Legislature, which does affect the states ability to monitor and enforce pollution regulations.

Sen. Muoz says hes eyeing funding increases for capital projects that were approved last year. All those projects are underfunded, he says, because of recent sharp inflation which is also driven by increasing energy prices. One-time money could cover those increases.

But his ongoing concern is paying state employees a wage that can compete with private-sector jobs. Were going to have to raise those payments in order to recruit engineers, lawyers, those degreed staff to get them back to state work, he says. But once again, that would require recurring money, not one-time oil and gas payouts.

Its like you only get one apple off the tree, Muoz says. And everyone will try to get a bite during New Mexicos notoriouslyshort legislative session. Last years session was 30 days. And though the upcoming session will be twice as long, it still may not be enough time to thoughtfully deal with the complications of this sudden cash infusion. The bigger the budget gets, he says, the harder it becomes to manage.

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I think that theresource cursereally explains a lot of New Mexicos difficulties, ODonnell says. Before going into the private sector and becoming a research professor of economics at the University of New Mexico, she held a number of leadership roles under former Gov. Bill Richardson, including director of state tax policy, deputy cabinet secretary for economic development and superintendent of the New Mexico Regulation and Licensing Department.

The resource curse theory explains why developing countries often underperform when their revenues are based on extractive resources usually fossil fuels. The developing economy relies heavily on the one money stream, both because it is lucrative and because of fears of upsetting the apple cart. Thus, it locks itself into an economic cycle tied to natural resources.

Its becoming increasingly clear to New Mexicans, in the wake of the most recent fires, that climate change is here, and that it has the potential to destroy the state and, really, to destroy the economy, ODonnell says. Putting all of our eggs in the oil and gas basket, to mix a metaphor terribly, becomes increasingly problematic.

A productive industry can and should also be a responsible one, says Meyers Sackett at the governors office. We remain committed to holding those who do not comply with our methane and ozone rules accountable. There is no situation where we will accept anything less than compliance, but there is every opportunity for the industry to exceed our requirements.

I dont care how high oil and gas gets this year, says Lucas Herndon, energy and policy director of ProgressNow New Mexico. I dont care if it stays high this year. I dont even care if it stays high next year. What I can guarantee is that sometime in the next two to five years, oil and gas will crash again.

He says that oil and gas is not a sustainable method for funding the state government. It never has been and it never will be It always goes back down.

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New Mexico's oil and gas revenues are breaking records and complicating budgets - New Mexico Political Report