Recession swamped six of the eight biggest oil-pumping U.S. states in 2016, according to a new report that illustrates the damaging effects of the global commodity’s slide on American energy.
Despite recent gains in oil prices following the Organization of the Petroleum Exporting Countries’ decision to cut production, petroleum’s rough ride in 2016 tripped Alaska, Louisiana, New Mexico, North Dakota, Oklahoma and Wyoming into recession, according to the S&P Global Ratings report.
The report, which estimated economic output for 2016, concluded that Texas and Montana barely avoided recession with slight increases in growth.
Seven of the eight states ranked in the bottom 10 in job creation, with only Texas, at No. 23, escaping that dubious distinction.
Employment opportunities, state budgets and economic growth have contracted, accordingly.
The development comes as the energy industry hopes for action by President Trump to open up new federal lands for production and lift environmental restrictions on pumping. But those prospective moves, while potentially helpful for long-term growth, could portend short-term challenges if they spark further price declines.
The price of West Texas Intermediate crude oil, the U.S. benchmark, was up 0.7% to $53.11 at 8:52 a.m.
The pain is particularly sharp in North Dakota. The state’s economy had flourished with the tremendous upswing in American oil and gas production over the last several years, but has taken a sharp turn for the worse. North Dakota lost 2.9% of its jobs in 2016 and its economy shrunk by 8.4%, according to the S&P report.
The only good news is that OPEC’s oil-pumping cuts helped stabilize the commodity after its precipitous drop to below $27 per barrel at one point in February 2016 amid a global glut of production.
Plus, there’s a general consensus that energy companies have little room left to cut after a year in which several dozen producers filed for bankruptcy and laid off thousands of workers.
“With oil prices appearing to have hit bottom and now stabilized somewhat, we anticipate a leveling off of economic performance among the oil-producing states,” S&P credit analyst Gabriel Petek said in the report. But “we expect any economic recovery to be modest.”
How each state is faring:
Gov. Bill Walker has said a new tax, such as an income tax or sales tax, is “likely going to be necessary” to offset a budget shortfall, according to S&P. The state has significant budget reserves, however.
With economic growth of 0.84% in 2016, Montana fared best of all eight oil states. Its job creation rate of 0.46% was second best.
Although oil and gas income made up only 2.2% of the state budget in the current two-year fiscal cycle, it’s expected to fall to 1.9% for the next period.
Oil’s struggles have pummeled the state’s budget, with forecasters recently projecting a $300 million decrease in revenue “as ongoing employment weakness in the oil industry has continued to affect individual and corporate income tax collections,” S&P reported.
Although the state’s offshore oil rigs are more resilient than easy-to-set-up-and-shut-down shale drilling projects in other parts of the country, the job outlook remains tepid.
“Although oil prices have somewhat rebounded, state officials report that in order for the employment situation to improve, a long-term bounce in production is
required,” S&P reported.
This state’s oil and gas industry cut 26.5% of its jobs in the 12-month period ending in October. Under current projections, without mid-year changes the 2017 fiscal year would end with a negative fund balance.
Crushed by oil’s rough 2016, North Dakota expects to have $1.4 billion less in next two-year budgeting cycle than it had projected two years ago. The state’s rate of job losses was second worst in the country.
The state’s strong budgetary reserves may help off set some of the pain, but S&P warned that using reserves to balance the budget instead of slashing spending “could lead to credit pressure.”
The commodity’s slump has dealt a sharp blow to Oklahoma’s bottom line. The state is currently projected to have 12.6% less spending capacity in its 2018 budget than it has in its 2017 budget.
“Given our overall assessment that Oklahoma is markedly vulnerable in the event of a U.S. downturn, and that management has yet to demonstrate a sustainable path toward improving the state’s financial position, even modest economic softness could have prolonged negative effects,” S&P said.
The state’s increasingly diversified economy has made it arguably the most resilient of the oil states, as it maintains its pristine AAA credit rating. Employment grew at a rate of 1.6% in 2016, more than triple the next-best rate among oil states.
Sales taxes are down and spending on public assistance is up. But with a rainy-day fund of more than $10 billion and oil production taxes representing only 4.3% of the budget for the next cycle, the state finances are in solid shape.
The state is expected to draw down on its sizable budget reserves to make ends meet. Coal’s decline is more damaging to this state than oil’s slide.
Employment fell 3.2% in 2016, the worst rate of all 50 states.