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Resiliency Weakened
Marcy Block
U.S. Public Finance
The rising price of oil and US crude oil production increases +1 212 908-0239
marcy.block@fitchratings.com
are improving economic and financial stability in most oil-
producing states, though state revenue growth prospects Rob Rowan
Fitch Wire
remain constrained and financial resiliency has been reduced +1 212 908-9159
in many of them, says Fitch Ratings. robert.rowan@fitchratings.com
The US oil industry’s momentum has benefitted natural resource (NR) states as the economic
growth and tax revenues tied to higher prices and production have risen. However, financial
operations for many could remain tight as they grapple with the fallout of successive one-time
actions, including substantial reserve use, applied in recent budgets in response to the
multi-year price and production downturn. Lessons learned from the recent bust may also
subdue states’ expectations for a long-term turnaround in the industry.
Recovery in the US oil industry is being driven by strong production growth — up 11% in 2017
— as shale companies grew production following organization retrenchments necessitated by
the late-2014 price plunge that bottomed at $26.21/barrel (bbl; West Texas Intermediate [WTI])
in February 2016.
Prices have been rising as well. An OPEC/Russia agreement to limit production and growing
global demand have pushed oil prices up beginning in 2017 from $52.33/bbl to $59.64/bbl by
year’s end. The 2017 acceleration boosted US rig counts to 930 at the end of the year; up 36%
from January 2017, but still far below the 1,904 rigs in service in September 2014.
Related Commentary
Higher Fiscal 2018 Natural Resource Revenue
Fitch: Global Economic Outlook
Increased Production Boosts Natural Resource Revenues (December 2017)
Fiscal 2018 Revenue Forecast
Fiscal 2018 Revised Forecast Fitch: OPEC Move Limits
($ Bil. Natural Resource Revenue) U.S. Oil Production 2017 (RHS) (000 bbl/Day)
Oversupply Risk, but Shale Key
Long Term (December 2017)
3.5 11,000
Louisiana’s (AA–) more modest 3% positive NR revenue revision points to the current recovery
primarily taking place in US shale formations rather than along the state’s principal Outer
Continental Shelf or its conventional oil fields, although the state overlays a small part of the
Haynesville Shale. However, the recovery provides significant benefits to the state, as
increased production flows through its 18 oil refineries that account for nearly one-fifth of the
nation’s refining capacity and delivers product to its extensive deep-water port system that
supports the US’s role as a net exporter of refined petroleum products. The shale by-product of
inexpensive natural gas has also been a boon to the state’s extensive petrochemical
manufacturing industry. The US has seen 38.5% growth in this industry’s GDP since 2008.
Economic momentum is also gaining in NR states. The Federal Reserve Bank of Kansas City’s
fourth quarter 2017 regional energy survey noted improved indexes among energy firms for
wages, employee hours worked, and business activity in Colorado, Kansas, Nebraska,
Oklahoma, Wyoming, Northern New Mexico, and Western Missouri. Firms indicated plans for
increased spending in 2018 across all categories but particularly in capital spending for
exploration and development. These sentiments are evidenced in improved mining employment
across NR states in 2017 following two years of sizable employment losses, although some
states continue to post mining job losses. Caution among businesses continues, captured in
firms’ comments in the Federal Reserve Bank of Dallas’ similar regional energy survey that
(%)
450 140 20
400 120 18
350 16
100 14
300
80 12
250
10
200 60 8
150 6
40
100 4
20
50 2
0 0 0
a
Alaska North Dakota Louisiana Oklahoma Texas
Oklahoma has had considerable difficulty in closing a current year revenue shortfall that developed
due to a litigation loss and it forecasts a fiscal 2019 budget gap arising from the shortfall, use of
one-time funds in fiscal 2018, and increasing spending obligations. Louisiana’s impending
$1 billion-plus fiscal 2019 fiscal cliff reflects the falloff of temporary tax measures enacted to close a
large fiscal 2016 budget gap partly attributable to the downturn. Energy states with more diverse
economies continue to fare better, such as Texas and Colorado. Yet, ongoing budget and revenue
adjustments by energy states are expected to remain a feature of the budget landscape as markets
remain turbulent and as many of these states seek to rebuild their reserves.
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