New Mexico poised for short-term budget boost as oil prices surge

U.S. Central Command on Tuesday announced it destroyed Iranian navy vessels laying mines near the Strait of Hormuz, through which roughly 20% of the world’s oil traverses on its journey from Middle Eastern oil fields to international markets. 

How oil prices and production in the New Mexico-Texas oil fields react to the international conflict depends on how long the narrow strait will be choked off, experts say. 

While New Mexico consumers should brace for higher prices at the pump — gas in New Mexico was averaging $3.41 late Tuesday, according to AAA — the soaring cost of crude oil could also add millions to the state’s coffers through taxes on oil and gas production. 

In fiscal year 2025, New Mexico produced some 745 million barrels of oil with an average price of $70.50 per barrel, according to the New Mexico Board of Finance. That production resulted in $1.7 billion in severance taxes for New Mexico. State forecasters have said a $1 change in the price of oil generally results in a $50 million direct change to gross severance tax and federal mineral leasing revenue for the state’s general fund. 

Many major energy companies held investor presentations before the conflict started late last month, making it more difficult to gauge how industry executives view the situation now. But Jack Williams, senior vice president of Exxon Mobil Corp., said at a Morgan Stanley energy conference earlier this month that the fate of the oil and gas market “really comes down to how long the Strait of Hormuz will be closed to tanker traffic.” 

Exxon operates in New Mexico under the name XTO Energy.

“But if you think of the physical supply of crude and supply of products and supply of natural gas in the U.S., we are obviously very, very well-positioned because of the shale revolution that took place in the last decade, where we have a lot of natural gas production here in the U.S., a lot of crude production,” Williams said. “It’s positioned our refining and chemical industries very helpfully, too, in terms of feed and energy costs. So we have good physical access to what we need here, but the prices are obviously subject to the global market.”

New Mexico is the nation’s second-largest crude oil-producing state after Texas. In 2024, New Mexico’s oil output reached a record high and accounted for 15% of total U.S. production. And unlike the oil shock of the 1970s when Middle Eastern producers cut off U.S. oil sales, sending the economy into a spiral, the U.S. is now a net exporter of oil and more resistant to international turmoil.

Xiaoyang Wang, an assistant economics professor at the University of New Mexico who has studied New Mexico oil and gas revenues, wrote in an email that oil futures price increases “can provide a boost to state revenue because (New Mexico) producers’ selling prices are typically linked to the West Texas Intermediate benchmark.”

“As WTI prices rise, producers generally receive higher prices for their oil, which in turn increases the value-based royalties and taxes collected by the state,” Wang said. “However, the impact of a short-term price jump in a single month is likely to dissipate within about six months. As a result, the longer-term revenue impact remains uncertain and will depend on how the situation in the Gulf region evolves.”

In the short term, “production volume is really insensitive to the price change,” Wang said. He added that building a new well “takes a long time,” upwards of two years.

The WTI crude oil price — the main benchmark for North American production — reached $120 per barrel on Monday, the highest level since 2022. But prices fell Tuesday, with crude oil futures settling around $83 per barrel.

On Tuesday, the U.S. Energy Information Administration released its short-term energy outlook, forecasting that the price of WTI will average $74 a barrel in 2026 and $61 a barrel in 2027, driven in part by the war’s effects on global markets.

That’s higher than New Mexico’s most recent revenue estimates, which project the price of oil to average $58 per barrel in the current budget year.

Phil Flynn, a senior market analyst for the Chicago-based commodities brokerage firm The PRICE Futures Group Inc., said he does not believe Iran can keep the Strait of Hormuz closed for an extended period of time. Oil prices can just as easily crash as they spiked if the Iran war is resolved, he said. 

“From the producer viewpoint, they’re used to volatility,” Flynn said. “I don’t know if this short little price spike would be enough to change anybody’s outlook. Probably not. But if we get into a situation where this war goes on for a while, there will be a lot of demand for oil from wherever we can get it. And that will definitely get those pumps going, especially in New Mexico and Texas.”

As for natural gas prices, the EIA said while “reduced liquefied natural gas flows through the Strait of Hormuz have caused the price of natural gas in Europe and Asia to increase, we expect U.S. natural gas prices to be relatively unaffected by this development.”

“Although the Strait of Hormuz is not physically blocked, the threat of attack by Iran and the cancellation of insurance coverage have led most tankers to avoid transiting the Strait,” the agency said. 

As a result, some oil production in the region has been shut in.

“If this reduction in vessel volume persists, oil storage behind the chokepoint will quickly fill, causing oil producers to shut in even more production, lending further support to oil prices.”

The agency forecast that retail gasoline prices will average $3.34 a gallon in 2026, 13% higher than the agency’s prediction last month before the onset of the war with Iran. 

State Sen. Larry Scott, a Hobbs Republican who started Lynx Petroleum in 1981, said he has sold oil for prices as low as $9 a barrel and as high as $140. On the ground, oil companies do not shift production plans according to the latest geopolitical developments, he said. 

Most oil and gas companies make spending plans six months to a year in advance and “are generally slow to modify … (based on) perception of what the long-term impacts on the markets will be,” he said.

“Right now, of course, it’s too early to tell what the outcome of this conflict is going to be,” Scott said. “But the recent significant upward (price) spike will probably not hold. In fact, I think it’s already started back the other direction (as) supply starts to stabilize.”

Justin Horwath covers tech and energy for the Journal. You can reach him at jhorwath@abqjournal.com.