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New Mexico, Carlsbad leaders show economic worry as the oil market collapses

A crash in oil prices left the Carlsbad community reeling from the potential bust of one of its most important economic drivers, as the spread of COVID-19 led to a dramatic drop in demand for oil.

As of Tuesday, the Chicago Mercantile Exchange (CME) reported crude trading at a future of $4.21 per barrel for May 2020, a day after the Exchange reported the price for next month at about -$30 per barrel – the first time in history that domestic crude had fallen below $0 per barrel.

Oil was expected to recover in the following months with CME reporting the price at $14.45 per barrel in June and $22.91 per barrel in July.

Monday’s price marked a 300 percent drop in the price per barrel, as traders were forced to pay others to take oil contracts as many were set to expire.

Ryan Flynn, executive director of the New Mexico Oil and Gas Association said on Monday that the coronavirus pandemic was the main force behind the market’s recent volatility.

“The price fluctuations we saw today demonstrated a phenomenon inherent in futures market that can happen as commodities contracts begin to expire,” he said.

“Traders were working to quickly exit positions in the context of infrastructure and storage constraints that have manifested due a sharp drop in demand. The market is fundamentally reflecting the unique supply and demand scenario driven by the coronavirus pandemic.”

The disruption in crude oil not only impacted the global market, already struggling from the effects of a seemingly concluded price war between Russia and Saudi Arabia but could prove devastating to local oilfield communities that rely on the industry for jobs and local revenue.

Situated on the western portion of the Permian Basin – believed to be the U.S.’ and possibly the world’s most active oilfield – Carlsbad was already bracing for the impact of the oil price collapse.

Mayor Dale Janway said the city’s budget and revenue from gross receipts taxes (GRTs) would “certainly” be affected as the city plans to reconfigure its finances in the wake of the market’s failure.

But more troubling, he said, was widespread job loss throughout the region as oil wells and drilling rigs were shuttered as demand fell for the products they produce.

New Mexico had just 84 active oil and gas rigs as of Friday, after steadily declining from 93 the week before and 100 on April 3, per data from Baker Hughes.

Those were the lowest rig count in New Mexico all year, as the averages for March and February were reported at 114, with January’s average at 106 rigs, records show.

Janway said the City would continue to support residents laid off from the oilfield and would be able to continue providing municipal services such as trash pick-up and sewer maintenance.

“While it is certain that declining oil prices will have an impact on our gross receipts taxes and budget, our absolute priority is our citizens, many of who have lost all of their income during this time of crisis. We will continue to serve the citizens of Carlsbad,” Janway said.

“Our City Council and City administration have maintained a very responsible budget, which ensures that we will continue to provide municipal services to our residents. As with every other community in the country right now, we are certainly having to take a hard look at our upcoming fiscal year to prepare for the future. We remain very optimistic of a strong recovery.”

The City of Carlsbad could receive some relief funding through the federal CARES Act passed last month – a multi-trillion dollar funding package intended to offset the impacts of the pandemic nationwide but only provided direct funds to cities with population’s higher than 500,000 – Janway said, and the City declared a state of emergency in March intending to unlock more federal funds.

“There is some funding to municipalities available through the CARES Act for reimbursement for lost GRT. That was one of the reasons why the City of Carlsbad declared an emergency several weeks ago,” Janway said. “We are working to make sure Carlsbad receives its share of this funding to allow us to best serve our citizens.”

At the Carlsbad Department of Development, a local non-profit that promotes business development in the city, Executive Director John Waters said it was unclear how the downturn in oil would impact the ability to attract new businesses to Carlsbad.

He said he also expected local revenue to be impacted.

“We will have to wait and see,” Waters said. “We still understand that the Delaware Basin will be one of the first basins to recover when the economic fog clears.”

Waters said he was optimistic that Carlsbad’s economy was diverse enough to survive the fall of oil prices through industries such as mining, manufacturing and the nuclear industry with satellite locations for Sandia and Los Alamos national laboratories and the Waste Isolation Pilot Plant nearby.

That could give Carlsbad an edge, Water said, over cities in West Texas that also rely on Permian Basin oil production, but he said Carlsbad will likely see a decline in local spending.

“We have a diverse economy that has thriving mining, manufacturing, and nuclear materials management industries to lean on, which is a contrast to many communities in West Texas,” he said.

“We have a significant number of families here that depend on a strong oil industry. When prices drop, it will undoubtedly affect the ability of those families to buy goods and services in the local community.”

Adrian Hedden can be reached at 575-628-5516, achedden@currentargus.com or @AdrianHedden on Twitter.

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