Oil prices have crashed nearly 50% in the past year. Not only is oil the fuel that drives our cars, it's arguably the backbone of our entire economy. Investors have scrambled to understand what the oil price crash means for them and their investments -- but the three biggest losers aren't who you think they are. Here's what you need to know.
Oil Prices Crash 101
From late 2014 through to, well, today, oil prices have been dropping. The jury is out on the exact reason oil prices are down, with hypotheses and accusations ranging from too much speculation to a conspiracy to kill America's natural gas revolution. But with oil prices dipping to levels not seen since the global financial crisis, the entire world wants to know what to do.
Unfortunately, some players are stuck between a rock and a hard place. At the exact moment they need to be acting fastest to diversify themselves from the oil price dip, those same dismal oil prices have rendered them immobile. Nowhere is this more true than with state governments, and the three biggest losers aren't catching any breaks.
The Lonestar State lays claim to one of our nation's largest economies, but it's an economy riding on the coattails of pricey petroleum products. In August 2014, the state collected a whopping $583 million in tax revenue from oil and natural gas production. By January 2015, that number had dropped 40% to $352 million.
Thankfully, Texas has been saving for a rainy day -- literally. Well, figuratively. But its "State Economic Stabilization Fund 0599," otherwise known as the Rainy Day Fund, has been snagging half of 75% of all oil and natural gas tax revenues that exceed fiscal 1987 collections. That's a long-winded way of saying that Texas played its cards right, and the recent decline in oil prices won't burn up its barbecue overnight. So, despite the major decline in revenues, Texas scoots by with third place.
2. North Dakota
In the same period during which Texas saw a 40% decline in tax revenues from oil and natural gas production, North Dakota experienced its own 21% drop to $254 million. That's a smaller drop, but oil is an essential player for the 740,000 residents of North Dakota. A year-long stretch of low oil prices and smaller revenues would result in approximately $830 million fewer tax dollars. Between 2013 and 2015, North Dakota estimates that about 5.5% of its total tax revenue will come from oil, specifically, with even more from oil-based sales taxes and corporate income taxes. That's similar in percentage to what the state spends on public safety or higher education -- a sizable slice that's a lot slimmer than North Dakota was expecting.
Critics may look back on 2015 and note that Alaska was kinda asking for it. The Last Frontier state calculated its annual operating budget based on oil prices of $105 per barrel -- they're currently chilling at $50. Alaska relies on taxes from crude oil production for an astonishing 90% of its operating budget.
The government is in crisis mode. With no sales or income taxes to buffer the hit, the state's $6 billion budget could shrink to $2.5 billion or less, depending where the oil price crash winds. In a recent "state of the budget" speech, Governor Bill Walker laid out an austerity plan for statewide spending cuts of up to 25% over the next four years. "I am talking about deep cuts," Walker noted, "and they will hurt."
The future of oil prices
Texas, North Dakota, and Alaska are struggling. Strapped state budgets can send ripple effects through an economy for years to come. Each state is addressing its shortcoming in its own way, but this oil price crash teaches us an important lesson. For states and investors alike, even seemingly stable commodities like oil can take your predictions and portfolios for a gut-wrenching roller-coaster ride. These three states won't go bankrupt overnight, and neither will your oil investments. But the damage to both will last long after any recovery pushes oil prices back up.