Press Release: IF WORLD OIL PRICES REMAIN UNSTABLE, BILLIONS OF DOLLARS IN TEXAS STATE AND LOCAL GOVERNMENT FUNDS AT RISK

NEWS RELEASE

FOR IMMEDIATE RELEASE
March 3, 2021

IF WORLD OIL PRICES REMAIN UNSTABLE, BILLIONS OF DOLLARS IN TEXAS STATE AND LOCAL GOVERNMENT FUNDS AT RISK
A new study shows how Texas economy and government funding would fare under four world oil price scenarios

[AUSTIN & HOUSTON, TEXAS] – Billions of dollars in funding for Texas state and local governments could be at risk if oil prices fall over the next 15 years, according to a new report released today. Without contingency plans in place, Texas education funding is specifically vulnerable if world oil and gas prices fail to rally, demonstrating the need for the State of Texas to prepare for its future as it approaches its bicentennial in 2036.

Those are the findings of a groundbreaking new report released by Texas 2036 and produced by Center for Houston’s Future that seeks to answer a fundamental question about what would happen to Texas’ economy and state and local government revenues under specific world oil price scenarios over the next 15 years, given the volatility of global markets. Under three of the four long-term oil price scenarios developed by a panel of Texas energy experts, state and local government funding in Texas would drop.

“While world oil prices could rebound, this research focuses on those scenarios intended to provoke thoughtful evaluation of potential actions that Texas might take to better insulate its economy, state government and school funding mechanisms, such as the Permanent School Fund, from possible negative consequences if world oil prices decline,” said A.J. Rodriguez, executive vice president of Texas 2036. “No one has a crystal ball to predict exactly how the next 15 years unfold, but bringing together experts and data now, we can help the state build in the resilience that will allow us to weather a world oil price decline if it happens.”

Completed in late 2020, this study is the first that seeks to bring together the various revenue streams supporting state and local government in Texas to consider what would happen if certain world oil price scenarios occur. Its findings are even more pressing after last month’s Texas power grid failure highlighted the reliance and interconnectedness of energy to our economy and public safety, and the loss of roughly 50,000 exploration and production jobs last year due to the pandemic.

The 60-page analysis examines the financial impact on schools and other local and state budget needs under four oil price scenarios. Those include oil prices consistently remain at $60 per barrel (where they are hovering today); Texas experiences either one or two boom-bust cycles in which prices fluctuate between $30 and $40 per barrel; or oil drops from $40 to $30 per barrel between now and 2036.

Among the key findings, the report found that if world oil prices experience a steady decline between 2021 and 2036 and reach $30 per barrel:

  • Texas’ economy could shrink by an aggregate of $1.6 trillion during that 15-year period, compared to maintaining constant at 2019 levels. Gross state product linked to oil and gas exploration and production in 2036 could be $155.6 billion less than a 2019 baseline of $281 billion, which reflects a more than 55 percent decline.
  • Texas state and local tax collections, including taxes and royalties derived from oil and gas exploration and production, could shrink by an aggregate of $128.9 billion during that 15-year period, compared to remaining constant at 2019 levels. Annual revenues, including taxes and royalties linked to oil and gas exploration and production in 2036, will be $9.7 billion less than a 2019 baseline which was 13.4 billion, which reflects a 73 percent decline.
  • Texas K-12 education funding derived from oil and gas exploration and production could shrink by an aggregate $29.0 billion during that 15-year period, compared to maintaining constant at 2019 levels. Annual K-12 revenues, including taxes and royalties linked to exploration and production in 2036, could be $1.8 billion less than a 2019 baseline, which was $5.8 billion or a decline of 31 percent.

“For more than a century, oil and gas production has been an anchor of the Texas economy and government revenues; but, an increasingly volatile, global energy market could impact the price of oil, which could significantly impact Texas’s economy and government revenues. It’s critical that our state plan for these potential future scenarios,” said Brett Perlman, CEO of Center for Houston’s Future. “This report analyzes the wide variety of revenue from oil and gas exploration to state and local governments today, allowing policy makers and budget writers to discuss and prepare for the possibility that these revenues are impacted by world oil market dynamics.”

To prepare for these challenges, the study makes multiple recommendations for the Legislature, including:

  • Streamlining the management of the state’s Permanent School Fund, which is now split between the State Board of Education and General Land Office and increasing annual distributions from the fund to primary and secondary education.
  • Increasing the investment returns for the state’s Economic Stabilization (Rainy Day) Fund, which is supported heavily by oil and gas severance taxes.
  • Requiring the state to issue long-term economic forecasts to assist state budget writers, building on the short-term forecasts already done by the Comptroller’s office.
  • Broadening the state’s tax base and considering other revenue opportunities and efficiencies.

To assess the economic implications of oil price scenarios through 2036, Center for Houston’s Future brought together a panel of energy experts, which developed the four oil price scenarios. Center for Houston’s Future then projected production and revenues under each, using data from the University of Texas at Austin’s Bureau of Economic Geology and estimated the amount that energy production would generate in local property taxes, state royalties, severance and income taxes, and other revenue sources that support public education.

In 2019, oil and gas exploration and production activity generated $13.4 billion in public finances in Texas — about $6 billion of that for public K-12 school funding, or 20 percent of the $32 billion annual expenditure, the report said.

If oil prices remain at $60 per barrel, as suggested by one of the scenarios evaluated in this study, energy production is expected to generate about 1.9 percent more per year for public school finances through 2036. That’s slightly above the anticipated student enrollment growth each year.

But under other less favorable scenarios examined by this study, revenue for public education would fall steeply. For example, if oil prices decline from $40 to $30, contributions to K-12 education would fall by 31 percent — or $1.8 billion a year— from 2019 levels. The impact will be greater in areas such as the Permian and Eagle Ford Basins, where the economy relies heavily on energy production.

The Texas Permanent School Fund (PSF), which is a $47 billion endowment designated for the benefit of public schools in Texas. Run by the State Board of Education (SBOE) and the General Land Office (GLO), who largely invest independently of each other, the fund makes per-student distributions to school districts, pays for things like textbooks and technology for schoolchildren, and guarantees bonds issued by local school districts. This research determines that the PSF received an estimated $1.1 billion in royalties from oil and gas activity on state owned lands. Under three of the four world oil price scenarios examined, this could decrease by 2036 – by as much as 69%. Compared to a steady $1.1 billion deposited over 16 years, this scenario would leave nearly $10 billion less available for investment and future distribution.

Outside of the world oil price scenarios discussed in this report, there is also the possibility that world oil markets during the next 15 years rebound. If this scenario occurs, at least for the intermediate term, the Texas economy, and the state and local governments would be positively impacted.

With so much riding on the oil and natural gas sector as an economic driver and government revenue source, Texas can help future-proof our state and local budgets by leveraging the data in this report and strengthening its long-term financial forecasting and planning.

To view the full report, visit: https://texas2036.org/changing-world-oil-markets-and-the-texas-economy/ or futurehouston.org/changing-world-oil-markets-and-the-texas-economy/.To view the findings related to education funding, visit: https://texas2036.org/future-proofing-texas-school-funding/.

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About Texas 2036:

Texas 2036 is a nonprofit organization building long-term, data-driven strategies to secure Texas' prosperity through our state’s bicentennial and beyond. We offer non-partisan ideas and modern solutions that are grounded in research and data on issues that matter most to all Texans. For more information, visit www.texas2036.org.

About Center for Houston’s Future:

CHF brings business, government, and community stakeholders together to engage in fact-based community strategic planning and collaboration on issues of great importance to the region. It engages in economic research and strategic planning, holds community events and develops leaders. For more information, visit centerforhoustonsfuture.org.

Media Contacts

Merrill Davis, Director of Communications
Texas 2036
Ph: 713-213-7297
Email: Merrill.Davis@Texas2036.org

Laura Goldberg, Vice President, Strategic Initiatives and Communications
Center for Houston’s Future
832-527-4255
Email: lgoldberg@futurehouston.org

Gary Susswein, Partner
New West Communications
Ph: 512-694-7909
Email: Gary@NewWestComms.com