Oil and gas revenue was making up an increasing portion of New Mexico’s budget, as production in the Permian Basin boomed, even as state officials sought to diversify its economy away from its reliance on fossil fuels.
In its most recent revenue estimates published in May, the Legislative Finance Committee (LFC) found that about half of General Fund revenue was tied to oil and gas, marking an increase from prior estimates that the industry accounted for about a third of the state’s budget.
Developed at the outset of this year’s 60-day session, where the legislature passed a record $9.6 billion budget, many ties the increase to growing extraction operations in southeast New Mexico’s Permian Basin Region.
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The shale region, which New Mexico shares with West Texas, produced about 5.7 million barrels per day (bpd) in June – more than any other onshore shale region in the U.S. – almost half of the U.S. total output of about 12 million bpd, according to the Energy Information Administration.
New Mexico was also second in the nation after Texas in the number of operating drilling rigs, according to Baker Hughes, with 111 rigs as of Friday, while the Permian itself had more rigs than other major basins combined at 342 rigs.
That meant about $7 billion in General Fund revenue in the last fiscal year, according to the LFC report, about 50 percent of total revenue into the fund.
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New Mexico works on solutions to alleviate oil and gas dependency
To protect the General Fund from future volatility in oil and gas, lawmakers passed Senate Bill 26 which was signed by Gov. Michelle Lujan Grisham to limit the amount of oil and gas revenue that be sent to the General Fund, earmarking revenue more than the five-year average for the Severance Tax Fund.
This would have the effect of limiting losses to the General Fund amid decreasing oil and gas production in the future, read an LFC analysis of the bill, making the budget about 11.4 percent less reliant on oil and gas.
“Furthermore, the new transfers would significantly decrease the volatility of the general fund and would decrease budgetary reliance on the oil and gas industry,” read the report.
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LFC Chairman Sen. George Munoz (D-4) of Gallup said the State was becoming more and more reliant on oil and gas to fund the state’s operations.
That can be dangerous, he said, as New Mexico is susceptible to the cyclical nature of oil and gas, riding high waves of revenue when the market for fossil fuels grows but also risking economic depression during busts.
“We’re becoming more and more reliant on oil and gas,” Munoz said. “We’re riding this big ramp up. They’ve always been the engine driver of New Mexico. When they do well, we do well. When they fail, we fail. That’s a problem for us.”
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Instead of relying singularly on the energy industry, Munoz said New Mexico should work to diversify its economy, seeking to gain revenue sources within the renewable energy and transmission sectors, along with outdoor recreation and tourism.
He said the state should look to others in the American West like Colorado and Arizona, which Munoz said were successfully able to increase tourism as a means of escaping dependence on market-drive industries like oil and gas.
“The best diversification policy is very wide,” he said.
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Improving education in New Mexico was another path toward a more stable economy, Munoz said, improving the workforce and allowing higher-paying jobs to be filled within the state.
“We’ve always had a problem with education,” he said. “It will improve our employment and economy when that workforce hits out of college.”
But for now, Munoz said New Mexico should find ways to save oil and gas revenue so it can be tapped when the industry ultimately busts again in the future.
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Oil and gas is ‘the rollercoaster’ New Mexico rides on
He said the LFC would likely receive a revenue report in August, showing exactly where the money is coming from and how dependent New Mexico will be on fossil fuels for spending, going into the next legislative session in January 2024.
“Our budgeting ability is dependent on what our oil and gas revenue is forecast at,” he said. “That’s the rollercoaster we’re on. If I had my way, I’d set New Mexico up so that the oil and gas revenue can…
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