We are all too aware of New Mexico’s dependence on the oil and gas industry. I’m not the only one noting that our economy is not diversified enough or that our state budget is scarily dependent on it. We talk of the cliff we are driving toward.
That cliff is alarmingly close. West Texas Intermediate (WTI) prices plunged from around $80 a barrel to below $60 last month, finally settling at around $63.
Oil and gas receipts comprise nearly 40% of the state budget. Every $1 drop in the price per barrel is equivalent to about a $60 million cut in state tax revenues. Currently, we are looking at over a $1 billion hit in tax revenues.
In a briefing to the Legislative Finance Committee in June 2024, it was estimated that production in the Permian Basin would begin to decline in the mid-2030s. However, industry may be responding more quickly to market forces than the economists’ predictions.
Travis Stice, the CEO of Diamondback Energy, the largest independent producer in the Permian Basin, said during the company’s earnings call last week that his prediction is that “production has peaked.” He noted declining crew count activity as a primary indicator.
Eddy County and Lea County remain the most active producers in the Permian Basin although Permian Basin activity is the lowest in three years.
Here’s the thing. The Dismal Science – economics – at its heart is fairly simple. Supply and demand are inversely proportional. When supply goes up, demand goes down, and price follows demand. Now, there are many, many factors that go into the price of a gallon of gasoline at the pump, but it begins with the price of a barrel of oil.
Analysts for JPMorgan predict the White House will not intervene – that is put a pause on tariffs – to support the U.S. oil industry unless and until prices reach $50 a barrel. “The Trump ‘put’ (tariff pause) does not extend to energy as the administration continues to prioritize lower oil prices to manage inflation,” JPMorgan released in an analyst note last week.
Oil executives have noted that much of the pumping equipment required to operate new wells in support of the administration’s “drill, baby, drill!” appeal are manufactured in China, now subject to a 30% import tax.
Secretary of Energy Chris Wright does favor a hybrid approach to energy production and warns against too-rapid decarbonization, stances I also agree with. He also supports innovation in nuclear power, which I think is also an important element in energy production.
Secretary Wright supports lower energy costs and replenishment of the Strategic Petroleum Reserve. Yet executives at Chevron and ConocoPhillips say they expect US oil production to plateau. “Chasing growth for growth’s sake has not proven to be particularly successful for our industry,” Chevron CEO Mike Wirth said at the CERAWeek by S&P Global Conference. “At some point, you’ve grown enough that you should start to move towards a plateau, and you should generate more free cash flow, rather than just more barrels.”
And OPEC announced this month that it will adjust production upward incrementally to 2.2 million barrels per day. The oil industry may be a favorite of the administration, but oil producers will follow the market rather than the White House.
The oil industry is not necessarily a favorite of New Mexico’s current administration. Rock, meet hard place. Just as oil prices started their downward spiral, a financial win for the state came in the passage of a 5% royalty rate hike on the state’s premium oil and gas leases – from 20% to 25%. The general industry wisdom is that WTI needs to be at $80 to start drilling. State Representative Mark Murphy (R-59), a Roswell oil industry veteran, warned that with oil prices hovering in the $60s, producers may see the higher royalty payments as an indicator to pause new production or even cap existing wells.
The Most Pro Oil White House Ever is tanking the market. A state looking to shore up its permanent funds is upping its cut on oil and gas revenues at the worst possible time. Is the fossil fuels cliff coming to meet us halfway?
Merritt Hamilton Allen is a PR executive and former Navy officer. She appeared regularly as a panelist on NM PBS and is a frequent guest on News Radio KKOB. A Republican for 36 years, she became an independent upon reading the 2024 Republican platform. She lives amicably with her Democratic husband north of I-40 where they run one head of dog, and one of cat. She can be reached at news.ind.merritt@gmail.com.
