Just a week into Wyoming’s Legislative session, state officials slashed revenue expectations for lawmakers crafting the two-year budget in Cheyenne.
The price of oil is to blame.
It’s not that oil prices in October, the last time state economists put out revenue estimates, were certain. The supply and demand balance and geopolitical issues were wildcards in the future prices of crude at that time.
But the market was performing well in spite of those uncertainties — until October.
By Christmas, West Texas Intermediate’s per barrel price, which served as a benchmark, had absorbed all the latent uncertainties in the market. Doubts drove down the price down by $15 compared to the start of the year.
In an update to Wyoming’s revenue projections released Monday, state economists have now balanced the government and investment analysts’ estimates of where prices will be in 2019 and beyond with the real time behavior playing out in the market, said Don Richards, co-chair of the Consensus Revenue Estimating Group, which produced the revenue estimates.
“There has been a significant price decline experienced in the last three months in the oil markets,” Richards said in an email.
In Wyoming, economists expect the Wyoming price of crude to average $45 a barrel in 2019 – down from an expected $60 a barrel in their October analysis. The Wyoming price averages lower than the national spot price, West Texas Intermediate, due to the added cost of transporting Wyoming crude to markets.
From severance taxes alone, the change in forecast will cut revenue expectations by $95.7 million over the next two years, while nearly $50 million has evaporated from federal mineral royalty expectations over the two-year budget. An increase in sales and use tax expectations — a revenue source crucial at the county level — marginally offsets crude oil losses, according to the report.
The CREG report notes the geopolitical risks that have undermined confidence in the price of crude in recent months, as well as doubts that global economic growth will be enough to eat up supply. The report quotes the International Energy Agency, which noted that forecasting prices in 2019 is “even more hazardous than usual.”
Richards, the CREG co-chair, said the updates attempts “to incorporate and reflect those developments and (uncertainties).”
Small variations in price have a huge impact in Wyoming, he noted.
For every $10 difference in the price of Wyoming crude, the state’s revenue experiences a $90 million difference, Richards said.
Though state estimates have caught up with current trends, and prices have fallen, much of the landscape for crude prices has been static for some time.
From the concerns over supply and demand to the political risks, the factors that play a role in crude prices are not particularly new, nor does the CREG report outline all the variables that could still play a role in changing the price of oil, said Chuck Mason, an energy economist at the University of Wyoming.
“You might argue that there is a little more uncertainty right now,” he said, compared to a few months ago, noting potential changes in the international market like an unknown agreement between the Russians and the Saudis as well as what has turned out to be a “red herring” in the form Iran sanctions that never hit the market.
For Mason, it had been somewhat surprising that the national spot price climbed to $70 in the first place. Meanwhile, the drop in price that occurred over the last few months may have over-corrected and prices could swing back up modestly, he said.
As for Wyoming’s estimates, with a full $15 a barrel less than the October outlook, economists are likely playing it safe, he said.
State economists in the Consensus Revenue Estimating Group have historically tried to keep estimates modest, preferring that the revenues they forecast for lawmakers beat expectations rather than under perform.
Much of the oil and gas activity in Wyoming today is concentrated in the Powder River Basin, though to a lesser extent drilling is also taking place in the western gas fields and the DJ basin east of Cheyenne. The rig count ticked up with the price of crude, and investment has been increasing over the last two years from companies with drilling plans in the Powder.
The drop in price has had mixed effects on companies.
Producers, like Peter Wold, of Casper-based Wold Oil Properties, say operators can make a living when the national benchmark is at $50. But it’s a break-even investment rather than profitable one at those prices.
Wold is one of the smaller firms, holding its own in a permitting war in the Powder River Basin. The family company has filed thousands of drilling permits in the state and was one of the first to get out in the field again post downturn, leveraging private equity dollars to drill in Wyoming when prices started to creep.
In the Powder today, Wold really needs to see a $70 price to feel encouraged and to make a good return, he said.
Fingers crossed, some positive projections from economists and analysts — that oil will rebound as global demand burns off the surplus supply — will prove true, Wold said.
“We’re no better than anybody else at reading the reports,” Wold said, of making predictions on price. But $70 oil in 2019 is what his company is hoping for, he said.
“There’s an awful lot of economists and they are suggesting the same thing,” Wold said. “We’ll keep our fingers crossed.”
There are those producers who tend to thrive when others are nervous. Kirkwood Oil and Gas, another exploration and production firm in Casper, views the sudden drop in price as a buying opportunity, though things will turn up again eventually.
“This is when we make all our money,” Steve Kirkwood said. “When things are in the tank.”