But it’s a mixed blessing that could come back to haunt New Mexicans well into 2016 and beyond, given the state’s heavy dependence on the oil and gas industry.
In general, the economic drag from low fuel prices will pack a far greater punch on the local economy than any financial bounce derived from consumer savings when heating their homes or filling their gas tanks, say economists at the University of New Mexico and New Mexico State University.
Consumers do tend to spend more on other goods, such as food at grocery stores or restaurants, thanks to savings on fuel. And that, in turn, can help buoy some businesses and increase state revenue from sales taxes.
But the economic bump doesn’t begin to compensate for the loss in state revenue from oil and gas operations, and from the decline in jobs and wages connected to the industry, said Jeffrey Mitchell, director of UNM’s Bureau of Business and Economic Research.
“Fuel savings do put more money in the hands of consumers who then spend more, and that increases revenue for some businesses while providing more gross receipts taxes for the state,” Mitchell told the Journal . “But losses in state revenue from lower taxes on oil and gas, and declining jobs and wages in that industry outweigh any gains … . The impact is only minimally offset.”
Given the oil and gas industry’s huge role in New Mexico, high energy prices can greatly boost local economic activity. But the opposite is not true, said NMSU economist Jim Peach.
“A drop in pump prices doesn’t make much difference in terms of boosting the economy,” Peach said. “You won’t ever see boom times because the price of oil went down.”
Consumers are enjoying substantial savings on gasoline and home heating.
As of mid-December, the average price for unleaded gas nationwide hit $2.01 per gallon, according to Gas-Buddy, a Maryland-based organization that tracks prices in all states.
In New Mexico, the average price for unleaded hit $1.91 per gallon on Dec. 17 and just $1.84 in Albuquerque, according to AAA. Some stations in Bernalillo County are selling unleaded for as low as $1.69 a gallon.
“The national average is just a penny away from the $2 per gallon threshold and prices continue to move lower,” said AAA Texas/New Mexico Representative Doug Shoupe. “The average is falling across the country, and that’s expected to continue through the end of 2015 and into the New Year.”
The latest price drops reflect a new round of price-cutting for crude oil on world markets, particularly after a Dec. 4 meeting of the Organization of Petroleum Exporting Countries, which has been locked in a price war with U.S. producers since summer 2014. OPEC declined to impose new production targets at its latest meeting, foreshadowing a lot more oil supply going into 2016. That, combined with the imminent restart of Iranian oil exports to western markets, sent global crude prices tumbling by about $10 to about $35 per barrel – its lowest level since before the recession in 2008, said Daniel Fine, associate director of the New Mexico Center for Energy Policy at the New Mexico Institute of Mining and Technology.
“It’s a stalemate between OPEC and U.S. producers who have surprised the OPEC countries by maintaining oil output through most of 2015,” Fine said. “It’s a time of reckoning. This is now the worst condition faced by oil markets in the U.S. in nearly 30 years.”
With global oversupply still high, and sluggish economic growth in China and other countries depressing demand, crude prices could still drop by another $10 to $15 per barrel during 2016, Fine said. As a result, gasoline prices are expected to continue downward, at least through mid-to-late winter. “We’ve seen some big price declines at the pump in recent weeks,” said Gas-Buddy senior petroleum analyst Will Speer. “That could slow down somewhat, but we project price drops to continue at least through the end of February.”
The plummet in gasoline prices – down about 60 percent since fall 2014 – has meant about $115 billion in total savings at the pumps for drivers in the U.S. since last January, according to AAA. In New Mexico, drivers have saved between $500 million and $600 million to date, according to UNM’s BBER.
Cheaper winter warmth
Natural gas prices also reached a 14-year low in mid-December, thanks to record supplies from
domestic shale gas production. Modern drilling technologies, which have opened vast new areas in hard-to-reach, hard-rock formations, have pushed proven domestic natural gas reserves to an all-time record of 388.8 trillion cubic feet as of November, according to the U.S. Energy Information Administration.
With a warmer-than-average winter forecast in most parts of the country, the EIA now estimates that U.S. consumers who heat their homes with natural gas will spend about 10 percent less on heating bills this winter, or about $64 less than last year.
In New Mexico, where about 67 percent of homes are heated with natural gas, the savings could be more. As of December, the New Mexico Gas Co. reported heating prices at just above 29 cents per therm – about 17 percent lower than the average monthly cost for natural gas last winter and about 34 percent below the average monthly cost over the past five years. Average heating bills in January are projected at $78, down from $88 last January and $105 in January 2014, according to NM Gas.
“We’re seeing steadily lower prices because, nationally, there’s plenty of supply and new supplies coming on, and U.S.-wide, the projection is for a milder winter,” said Gary Murray, the company’s director of gas supply and market origination. “Projections show that it may be colder in the Southwest and West this winter than elsewhere, and that could drive up heating bills here a bit. But, ultimately, customers control the thermostats in their homes and they will determine how much gas they end up using.”
Savings fuel spending
How much consumer savings on gasoline and heating gets translated into higher spending on other goods and services is a matter of debate among economists.
The U.S. president’s Council of Economic Advisors estimates about 45 percent of savings gets spent on other things, said BBER’s Mitchell. And a recent J.P. Morgan Chase Institute study of spending trends based on data pulled from nearly 26 million credit and debit cards showed that up to 78 percent of savings on gasoline is getting redirected to other consumer purchases. About 18 percent goes to eating out, 10 percent to groceries, and most of the rest to entertainment, electronics and appliances, and charitable donations.
But there are limitations on the impact. For one thing, it takes time for consumers to gain confidence that low fuel prices will last and the trends shown in the J.P. Morgan-Chase study may still be recent, Mitchell said. In addition, gas spending represents less than 5 percent of consumer spending, so beneficial economic spillover from lower prices may be small.
Perhaps most important in a heavy oil-and-gas-producing state like New Mexico, the benefits of consumer savings don’t come close to compensating for losses from the bust in production in the state’s oil-and-gas basins.
At least 6,000 people are estimated to have lost their jobs since last year in the San Juan Basin in northwest New Mexico and the Permian Basin in the southeast. More layoffs are expected as oil prices continue to drop and operators eventually start to cut back output rather than just curtail new drilling.
“The number of rigs operating in the state has dropped from about 100 last year to less than 40 now,” said NMSU’s Peach. “The impact so far on employment is just the tip of the iceberg as oil-field service companies cut back operations.
And the cuts in jobs and wages comes on top of the already sluggish economy in New Mexico, which has yet to fully emerge from the recession.
“We’re still 22,000 jobs below where we were in December 2007 before the recession started,” Peach said.
State revenue takes a hit
Then there’s the impact on government revenue, since about one-third of all annual state income comes from oil and gas operations. The drop in energy prices and slowdown in operations sharply curtailed the amount of “new money” available in the current fiscal year 2016 budget, which ends in June. By the time the 2015 Legislative session started last January, the state had only $83 million in new money available to spend on government programs, or less than one-third of the $285 million originally estimated in summer 2014.
This month, state officials shaved $60 million from their estimates of new money available for FY 2017 because of declining oil and gas prices, cutting the total from $292 million in August to $232 million now. And, with the latest estimate based on $49 per barrel of oil, plus the likelihood that the price will continue to drop into 2016, the government could be forced again to lower new money projections when the session starts.
The current projection is just a “guesstimate,” said Legislative Finance Committee Chairman Sen. John Arthur Smith, D-Deming.
“I wouldn’t be a bit surprised for it to be lowered more, but we won’t know until we get preliminary forecasts in late January or early February when the session is already underway,” Smith said. “We might have to make more adjustments at that time. It’s a challenge for us.”