6 questions answered about the energy industry's record-setting streak of contraction
State tax revenues continue to get pummeled and the economic effects will be felt across the state as the Oklahoma Energy Index indicates a record-setting 22nd straight month of industry contraction.
The state’s August receipts from gross production taxes on natural gas and oil sales were off by more than 46% compared to the same month in 2019, according to data provided by State Treasurer Randy McDaniel. The revenue is $430 million lower when comparing the most recent 12 months to the year before.
A down energy industry also creates other financial headaches for the state, as fewer energy industry workers generally translate into smaller income tax and sales tax revenues.
“The gross receipts (data) provides evidence of the challenges facing Oklahoma’s anchor industry,” McDaniel said. “We will likely see a growing ripple effect into other sectors of the economy.”
What is the Oklahoma Energy Index and why does it matter?
The Oklahoma Energy Index is published monthly by the Petroleum Alliance of Oklahoma and its Oklahoma Energy Index partners, the Steven C. Agee Economic Research and Policy Institute at Oklahoma City University and EnergyNet, an energy industry acquisitions and divestitures firm.
It analyzes numbers of working drilling rigs, employment levels at energy production and support companies and commodity prices and compares those to averages set in the year 2000.
And in July, it was down 42% from the same time a year ago.
The index’s ongoing 22 month decline makes the current energy slump the longest the index has tracked in the 20 years it covers, noted Agee Institute Executive Director Russell Evans. Energy activity in Oklahoma is approaching a level that hadn’t been seen in the state since before horizontal drilling in shale plays became an industry norm.
“While I expect we haven’t heard the last of consolidations, debt restructurings, asset sales and layoffs, there is evidence that the current cycle is searching for a bottom,” said Evans. “But with nearly unprecedented uncertainty of future economic conditions and energy demand, the energy industry’s critical contributions to the state’s economy may be quiet for some time.”
With reduced activity in the industry comes reduced collections by the state for the gross production taxes.
What does the gross production tax fund and how much does it produce?
Oklahoma relies on the gross production tax to help fund state agencies that provide a wide range of services to its residents.
Gross production taxes provided between 3.3% and 8.5% of total state receipts in the past six fiscal years, ranging from $336.6 million in FY 2016 to $1.15 billion in FY 2019. Amounts collected change depending on the tax rate (it was increased by lawmakers in 2018), commodity values and amounts of oil and gas produced and sold.
State law requires some of the gross production tax flow directly into designated revolving funds and specific programs. Remaining gross production tax receipts are allocated to Oklahoma’s general revenue fund.
Gross production taxes are estimated to provide receipts of $576.5 million, or 8.6% of anticipated total General Revenue allocations, during the current fiscal year.
If the state is already slashing its budget, should more cuts be expected?
A report made by the Oklahoma Board of Equalization in February provided Oklahoma’s legislature the authority to spend up to $8.244 billion for the current fiscal year, which started July 1.
In April, it revised the budget to $6.878 billion, a difference of about $1.36 billion, forcing legislators to scramble to find ways to plug holes.
Legislators addressed the issue by cutting most state agencies’ individual budgets by 4.4%, year over year, by tapping into state reserve accounts, by sweeping some agency revolving funds and by reducing direct contributions to the state's retirement accounts by about $73 million annually.
The weakened energy industry means the legislators might need to prepare for continued depressed levels of funding, according to Petroleum Alliance President Brook A. Simmons.
“We hope we have reached the bottom of this devastating downturn regarding drilling activity,” Simmons said. “But even if we are at the bottom, there is prolonged economic uncertainty ahead of us. Drilling rigs are the best barometer for Oklahoma’s economy as well as the state budget. With a decreased level of drilling activity for the foreseeable future, state policymakers must prepare now for a weakened oil and natural gas industry that is unable to deliver funding levels of the past.”
Will it turn around?
For business leaders in Oklahoma’s oil and natural gas industry, the ebbs and flows of supply and demand mean a continual re-evaluation of forecasts and future plans. The economic position they are in now, however, goes far beyond that, said one industry analyst.
“All businesses who are even remotely tied to the oil and natural gas industry are suffering,” said Ethan House, vice president of business development for EnergyNet. “Oklahomans are resilient. The oil and gas industry is resilient. There will be a recovery, but that may be years away.”