FARMINGTON – With the COVID-19 pandemic spreading across the world, the global demand and consumption of oil took a sharp decline, culminating in a historic drop in oil prices last month.
So what does the drop in oil prices mean for the tax base for Four Corners communities?
“We likely won’t see much of an impact as long as natural gas prices stay steady,” said Gwen Lachelt, La Plata County commissioner. The majority of La Plata County’s energy sector revenue comes from natural gas and relies very little on oil, she said.
What’s more, the change in market price wouldn’t have an immediate impact on county revenue, she said. “Whatever the price is, whatever is producing now, the county will get those revenues two years from now,” she said. “So what we’re getting right now is based on the price from two years ago.”
The county’s budget is not as reliant on oil or even natural gas as it was before 2013, when the natural gas market took a sharp hit, Lachelt said. She estimates the natural gas revenues the county receives have declined by about 50%.
“The largest share of the county budget comes from sales tax, then property tax, then state and federal grants, and then energy,” she said.
According to Lachelt, after the decline in natural gas prices and revenue in 2013, the county took a cautious approach for the past seven years and built up its fund balance. The county is in a stronger financial situation because it diversified away from the energy sector, allowing it to weather the pandemic without having to do layoffs, at least so far, she said.
The same might not be the case for New Mexico.
“It could have a devastating impact on New Mexico because the state relies so heavily on oil and gas to fund a big portion of its budget,” Lachelt said.
The majority of New Mexico’s oil wells lie in the Permian Basis in the south, while San Juan County – like La Plata County – primarily has natural gas wells, according to the county.
“Oil and gas and coal are huge for San Juan County,” said George Sharpe, investment manager with Merrion Oil & Gas. “When the coal and power plant go away, property tax will go up because they’ve lost a big tax base.”
The San Juan Generating Station in Farmington is scheduled to end production in 2022.
Another side effect of the decrease in oil prices could be a slowdown or decrease of investment in new wells, Sharpe said.
Sharpe said there has been speculation in the industry that the price of natural gas could increase because of the hit to the oil industry.
“In April, gas prices have never been lower than they are currently, but they’re forecast to go up,” he said.
With the price of oil lower, the production of oil will decrease. Since natural gas is often produced alongside the oil, once companies quit producing so much oil, they will also quit producing natural gas alongside it, Sharpe said. This could cause the price of natural gas to increase, since demand has remained relatively stable. Natural gas is primarily used in manufacturing, powering homes and electricity, he said.
Yet Sharpe said any increase in demand would most likely not be enough to stimulate new development of natural gas wells.
Overall, oil development has been more impacted by the pandemic than natural gas, Sharpe and Lachelt said.
“It’s a bigger deal here in Farmington than it is for Durango, which has a significantly more diverse economy than Farmington does,” Sharpe said