Against a backdrop of shifting economic momentum shaded in pessimistic tones, a resurgence of the oil and gas sector over the past year is quickly refueling U.S. mineral-producing states' coffers. However, the risks of elevated energy prices, coupled with lingering supply-chain frictions and tightening monetary policy, could tip the economic balance toward an outright slump. Headwinds notwithstanding, S&P Global Ratings believes near-term economic and financial conditions are comparatively brighter for mineral-producing states as they stand well positioned to absorb macroeconomic weaknesses and further strengthen their balance sheets.

At play are two opposing pressures for mineral-producing states: relatively higher prices and softening economic conditions. Citing elevated geopolitical uncertainty and insufficient supply to match growing demand, S&P Global Ratings revised its oil and natural gas price assumptions for the remainder of 2022 into 2023 (For more information, see "S&P Global Ratings Raises Oil And Natural Gas Price Assumptions On Further Market Price Step-Ups," published June 8, 2022, on RatingsDirect). While oil prices have moderated from their most recent peak, absent a mechanism for markets to meaningfully rein in prices in the short term, higher-for-longer may be the guiding refrain for state budget writers as they monitor and assess longer-term revenue forecasts. In both elevated and low energy price environments however, the sector's volatility can make budgets look considerably different from their original outlook.

To illustrate this point, we examined the significant surge in unexpected state production (or equivalent) tax revenue gains due primarily to elevated oil and gas prices in fiscal 2022. Texas' natural gas and oil production taxes (September 2021-June 2022) are up, respectively, 192.6% and 89.7%, compared to the prior fiscal year, and collectively $3.6 billion (75%) over original forecasted levels. In addition, North Dakota's oil tax collections (July 2021-May 2022) are 140% higher ($640.7 million) than the original legislative forecast. Similarly, Louisiana's general severance tax collections are up 58% (July 2021-May 2022) compared to the previous fiscal year and have exceeded original total fiscal- year-end collections. New Mexico's fiscal 2022 forecast projects severance tax receipts (pledged revenues to severance tax bonds) increasing nearly 115% in fiscal 2022 to $1.6 billion. Oklahoma's gross production taxes are likewise up slightly over 162% compared to fiscal 2021 (July 2021-May 2022).

Table 1

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Coinciding with elevated energy and commodity prices, among other factors, S&P Global Economics revised its 2022 U.S. GDP forecast down on May 17 to 2.4% from 3.2%, after measuring 5.7% for 2021. By 2023, growth is forecast to further moderate, registering at 1.6% relative to 2022. (For more information, see "Economic Outlook U.S. Q3 2022: The Summer Of Our Discontent," June 27, 2022.)

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The recovery for mineral-producing states hasn't been underpinned solely by the oil and gas sector. Rather, it has come from a combination of federal stimulus that has buoyed personal and state balance sheets in the face of peak pandemic-induced economic pressures and expansive, albeit uneven, growth, across most economic sectors. However, with national economic growth decelerating in 2022 and likely into 2023, we believe mineral-producing states may be uniquely positioned to blunt, at least partly, wider economic softness. Revenues generated from energy production activities could sustain sufficient momentum in the short-to-medium term to offset revenue softness that could materialize in other areas like income or sales taxes. However, should economic conditions erode rapidly, the extended runway may not buy them much time, requiring budget writers to course correct revenue estimates to cover potential gaps, particularly as the remaining extraordinary federal stimulus funds are spent down.

Favorably, prudent budget management across mineral-producing states has resulted in strengthened balance sheets with strong fiscal cushions to support operations through an increasingly volatile period with potential shifts in revenues yet to come. For states in our survey, the average reserve balance median was 24.5% as a percentage of expenditures in fiscal 2021, compared to the national median of approximately 10%.

Brighter Outlook In 2023 May Dim For Some In 2024

With the first half of the calendar year in the rear-view mirror, forecast growth for 2022 is coming into greater focus. Texas' broad and diverse economy supports strong year-over-year real GSP growth, leading all other mineral-producing states and is just shy of taking the nation's top spot in 2022. Texas is followed by New Mexico (8) and Oklahoma (14). Among the bottom half of states, Wyoming (34), Louisiana (43), North Dakota (45), Alaska (47), and West Virginia (49) are all expected to grow at a slower clip in 2022 than the all-state median of approximately 1.9%.

In 2023, real GSP growth projections are expected to accelerate for nearly all mineral-producing states. Five of the eight states surveyed will rank among the top-10 fastest growing, led by North Dakota (3), New Mexico (4), and Oklahoma (5) in the top five, followed by Texas (7), Alaska (8), and Wyoming (10) to round out the top-10. Louisiana is not far behind, ranking 14 among mineral-producing states in the top-15. West Virginia remains near the bottom of the list at 45. Median growth of states reviewed in our survey is 75 bps higher than the all-states median in 2023.

All states are forecasted to experience tempered growth in 2024, although mineral-producing states are expected to exceed the all-state median growth by 16 bps. Only North Dakota (4), Texas (8), and New Mexico (10) are expected to remain in the top-10 in 2024, while Wyoming (15) is expected to remain within the top-15. Oklahoma (17), Alaska (18), and Louisiana (20) are forecasted to have growth that remains among the top half of states. West Virginia's growth prospects remain the among the lowest for all states, ranking 49 in 2024.

Table 3

Mining Sector Employment Improves But Lags Pre-Pandemic Levels

Overall, the mining sector employment picture remains mixed for mineral-producing states in our survey. The decline in mining sector employment has been persistent since its decade peak in the fall of 2014 (references to mining sector in this report correspond to the North American Industry Classification System (NAICS) 21: Mining, Quarrying, and Oil and Gas Extraction). Nationally, total employment in the mining and logging sector is roughly 70% the size from a decade ago. In fact, only New Mexico has experienced expansion of mining sector employment over the past decade, exceeding its 2012 levels beginning in 2018. To date, New Mexico, North Dakota, and Texas have exceeded 70% of their decadal levels.

However, all states dropped following the onset of the global pandemic. Louisiana, Oklahoma, Wyoming, and West Virginia's mining sector employment, while improving from pandemic lows, are well below where they stood a decade ago.

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Taking an expanded look at total nonfarm employment, only Texas has recovered total lost jobs during the pandemic (May reading). That said, total nonfarm employment has been comparatively soft with only New Mexico, North Dakota, Oklahoma, and Texas exceeding their 2012 levels.

Among mining states, Wyoming has the highest share of nonfarm employment in the sector, accounting for approximately 5.5% of its total employment base, followed by North Dakota at roughly 3.6%. While all other states are below 3%, compared to the 0.4% national level, all mineral-producing states have a disproportionately greater exposure.

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While we expect that the mineral-producing states in our survey will benefit from a stronger oil and gas sector and add jobs at a faster pace in 2022, a tight labor market will continue to weigh on the sector's ability to revert back to levels from a decade ago.

Evolving Industry Risks Ease In The Near Term

Apart from evolving economic conditions, oil- and other mineral-producing states face ongoing risk from increasing regulation on energy production and an accelerating transition to less carbon-intensive forms of energy. We believe these evolving credit risks could lead to pressures on some state operating environments longer term. Positively, many states have implemented policies and programs to mitigate against the boom-and-bust cycles typical of the volatile energy sector. Notably, states in our survey have typically limited the effect on their general fund budgets by building comparatively large reserve balances and have over time structurally diverted direct severance taxes to other purposes beyond general operations. We do not anticipate sectoral changes occurring in the near term, particularly with deteriorating economic conditions underscored by high energy prices and supply constraints. Outside the immediate outlook period, we believe states and local governments with a comparatively greater concentration of oil and gas activities could face economic headwinds absent continued proactive measures to adapt to the changing regulatory environment.

Isolating Oil And Other Mining Activity's Effects On State Budgets

In Table 4, we provided a summary of key price and budgetary assumptions among the seven oil-producing states' levels of direct fiscal dependence on oil-related revenue (West Virginia data omitted given that severance tax collections are largely derived from coal). Though the direct reliance on oil-related revenues may be comparatively small for some states, we've observed it does not necessarily insulate budgets from the indirect fiscal fallout to other potentially sensitive revenues streams (such as corporate income, individual income, and sales taxes) and when economic conditions turn. Even with extraordinary federal support remaining, those with a heavy direct reliance on oil-related activities, particularly at the local level, will have had to contend with evolving economic and budgetary dynamics.

Beyond oil, other mining activities can play a significant role in state budgets, such as coal and natural gas extraction. For each of the states below, we provide additional detail on how oil prices and production may affect budgets.

Table 4

State Economic Snapshot--Mining Sector In Focus

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Alaska 

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Table 5

Louisiana 

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Table 6

New Mexico 

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Table 7

North Dakota  

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Table 8

Oklahoma 

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Table 9

Texas 

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Table 10

West Virginia  

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Table 11

Wyoming 

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