I am writing today to announce the closure of the New Mexico Independent. After three and a half years of operation in New Mexico, the board of the American Independent News Network, has decided to shift publication of its news…
While environmental activists played their part yesterday during demonstrations at the capitol building, going so far as to dress up as solar panels and to sing the tune of “You Are My Sunshine,” their counterparts, the anti-cap-and-trade contingency who has…
Roughly one quarter of University of New Mexico students are unimpressed with the state’s flagship public school, according to a survey that questioned college students about their higher education experiences.
As New Mexico debates regulations and revenue related to the oil and natural gas industry, conflicting assertions have resulted in a confusing jumble of claims and counter-claims. But by examining the broader context of fossil fuel energy development in the state, policy options that meet important goals for New Mexico become clear.
Regulations and tax policy should at a minimum have three goals: protect the health and safety of citizens and the environment; sustain the oil and natural gas industry as a productive part of New Mexico’s economy; and provide revenue to help the state to pay for essential services.
Right now, the state is more successfully doing the first two things while struggling with revenue and spending decisions that affect basic government services.
There is little disagreement that the state should provide for the health and safety of its citizens and protect the environment. Nor is there much disagreement that preventative approaches like strong pit rule standards are a more effective way to do this than remediating damage caused by chemicals and other drilling substances to soil and water.
Put another way, the cost of industry compliance with the state’s pit rule is a good value for taxpayers.
But will such regulations push industry from the state? The answer is no.
The oil and natural gas industry is guided chiefly by the location of reserves. Other factors such as price, access to markets and technology have a much more significant effect on industry activities.
Currently there is some debate about how much the state’s pit rule will add to the cost of oil and natural gas drilling in the New Mexico. The New Mexico Oil and Gas Association quotes a figure of $200,000 per well, but the state’s Oil Conservation Division says it ranges from $3,000 to $90,000. Either way, this cost represents a small fraction of the cost of drilling and operating oil and natural gas wells.
According to the U.S. Energy Information Administration (EIA), well equipment and operating costs have been relatively flat in recent decades, while oil and natural gas prices have increased dramatically. That’s why many energy corporations set all-time profit records in recent years.
The reason new permits to drill and drilling rig counts are down is not because of cost — either from regulations or taxes. It’s because of falling prices, which have caused pull-backs across the West, not just in New Mexico.
From 1997 to 2007, “well head” natural gas prices in New Mexico rose by nearly 300 percent before declining precipitously in the last year, according to EIA. These fluctuations explain company decisions to expand or contract drilling. When prices return, which they will, so will new drilling.
Conversely, repealing regulations or cutting taxes is not an effective way to stimulate new drilling or capture more revenue.
In the late 1990s, Montana reduced its tax rates and extended incentives to the oil and natural gas industry. By comparison, Wyoming — after commissioning several independent studies — determined that tax reductions and incentives would have no effect on industry behavior and repealed a recently granted severance tax reduction.
The result? Montana with its lower tax rate and incentives has seen less oil and natural gas development and lost more than half a billion dollars in revenue, while Wyoming with the highest energy tax rates in the region has seen the largest increase in production and captured more revenue than any other Rocky Mountain state.
In New Mexico, the oil and gas industry is small in employment and personal income terms (2 percent of employment and 3 percent of personal income in 2006) but important to state and local revenue. In 2006, oil and gas revenue made up 18 percent of all state and local revenue. The current recession and falling energy prices have left the state with an estimated $454 million budget shortfall for fiscal year 2009.
New Mexico has a good energy revenue policy with an effective tax rate second only to Wyoming in the region, and several permanent funds that help to smooth revenue volatility. But, because the state relies so heavily on energy revenue to cover essential services like education, it is exposed to downturns in the energy economy.
New Mexico should reduce its reliance on energy revenue for essential services because of its inherent volatility. Instead, this revenue could increase permanent fund investments that will in turn provide larger and more predictable annual distributions.
Today, the state has largely created a level playing field for industry that also protects public health and safety. As New Mexico turns to findings ways to resolve its short-term budget gap, it should at least benefit from this experience by re-examining how energy revenue is invested and spent.
Ben Alexander is associate director of Headwaters Economics, an independent, nonprofit research group whose mission is to improve community development and land management decisions in the West.
