- Oil and natural gas prices fell from a recent peak in 2022 as an economic slowdown takes hold, but many mineral-producing U.S. states are poised to lead economic (real gross state product [GSP]) growth in calendar 2023, with five ranking among the top 10 for real GSP growth nationally.
- By 2024, however, S&P Global Market Intelligence forecasts that Texas will be one of only two states forecast to remain in the top 10, and it is projected to be the only state in the top 10 by 2025, with its GSP growth ranking third among all states.
- While we do not expect a sharp pull-back in oil exploration and production, mineral producing states may need to prepare financial tools, including tighter spending controls, conservative forecasting, and upkeep of high reserves to guard against potential strain on their economies and revenues.
Despite the oil and gas sector's persistent ebbs and flows, U.S. states with economies that are relatively dependent on mineral production are poised to lead economic growth by year-end. However, 2023 might be as good as it gets for states reviewed in our survey, with the lone exception of economic juggernaut Texas. With our baseline view that broader U.S. economic growth is cooling, recent outsized growth for mineral-producing states (primarily, oil and natural gas activities) may be unlikely outside of the short term. In S&P Global Ratings' view, strong balance sheets and prudent budgetary management should help blunt the potential downside to the broader U.S. economy and preserve overall credit quality.
Oil And Gas Are Off Their 2022 Peak Prices, But Expected To Remain Steady Over The Coming Year
Following an uptick in oil prices throughout much of 2022, prices gently seesawed in the first half of the year but have recently ticked up. Evolving sector dynamics--including China's uncertain growth prospects, buoyant Russian production, and uncertainty from domestic credit tightening--have contributed, in part, to our downward revision of hydrocarbon price assumptions for the remainder of the year (see "S&P Global Ratings Lowers Hydrocarbon Price Assumptions On Moderate Demand," published June 22, 2023, on RatingsDirect).
|Oil and natural gas price assumptions|
|--New prices--||--Old prices--|
|WTI ($/bbl)||Brent ($/bbl)||Henry Hub ($/mmBtu)||AECO ($/mmBtu)||TTF ($/mmBtu)||WTI ($/bbl)||Brent ($/bbl)||Henry Hub ($/mmBtu)||AECO ($/mmBtu)||TTF ($/mmBtu)|
|Remainder of 2023||80||85||2.5||1.75||14||85||90||3.25||2.25||18|
|2026 and beyond||80||85||4.25||3.25||10||80||85||4.25||3.25||10|
|Bbl--Barrel. WTI--West Texas Intermediate. HH--Henry Hub. TTF--Title Transfer Facility. AECO--Alberta Energy Co. mmBtu--Million Btu. Note: Prices are rounded to the nearest $5/bbl and 25 cents/mmBtu.|
|Source: S&P Global Ratings.|
S&P Global Commodity Insights' short-term outlook reflects West Texas Intermediate and Dated Brent prices remaining relatively flat through 2024, with U.S. crude production estimated to increase by an additional 950,000 barrels per day (b/d) in 2023 to an annual average of 12.84 million b/d (see "North America Short-Term Outlook--Crude Oil, August 2023: Rigs Continue To Drop But Strong Output Growth Remains Intact," published July 31, 2023 [https://connect.ihsmarkit.com/master-viewer/show/phoenix/4815003]). A modest increase in U.S. crude production, even if short-lived, stands to further support revenue collections generated by mineral-producing activities--namely, severance taxes and sales taxes.
(Note: S&P Global Commodity Insights is separate and distinct from S&P Global Ratings. Certain activities of these business units are kept separate from each other to preserve the independence and objectivity of their respective activities.)
Economic Outlook Remains Positive, But Ticking Slower
While the U.S economy has proven resilient, S&P Global Market Intelligence's baseline scenario forecasts latent effects of the Federal Reserve's actions to stamp out stubborn and unsustainable price inflation could signal a period of a higher-for-longer interest rate environment, leading to a shallower and attenuated slowdown in economic activity. As a result of softer hydrocarbon price support, the near-term outlook for mineral-producing states could also be mixed. (For more information, see "Economic Outlook U.S. Q3 2023: A Sticky Slowdown Means Higher For Longer," published June 26, 2023.)
|Real gross state product data for major mineral-producing states|
|Year-over-year real gross state product (GSP)|
|Growth rate (%)||Rank||Growth rate (%)||Rank||Growth rate (%)||Rank||Growth rate (%)||Rank|
|S&P Global Economics U.S. forecast real GDP||2.1||1.7||1.3||1.5|
|P--Projected (rounded). Real gross state product (2012 USD, seasonally adjusted annual rate). Ranks shown are from 1 (fastest growth) to 50 (slowest).|
|Sources: Bureau of Economic Analysis; S&P Global Market Intelligence; S&P Global Ratings.|
Exploration and production activities have experienced multiple boom-and-bust cycles, driven by changes in global demand. This inherent volatility can lead to growth challenges over longer periods. The 10-year compound annual growth rate (CAGR) for mineral-producing states (other than Texas) remains subdued at less than 1%, ranking among the slowest GSP growth between all states. Again, only Texas significantly exceeds the national median rate, by nearly 2x, supported by its broad and diverse economy and population growth over the last decade. In a slower economic growth environment, those states with economic bases disproportionately reliant on the mining sector to underscore broader growth could experience lagging growth or stagnation that cascades to other sectors in their local communities.
|State rank by 10-year compound annual growth rate (2022)|
|Sources: Bureau of Economic Analysis, S&P Global Ratings.|
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 10-year peak in fall 2014, although employment has trended positively in the past three years following the pandemic-induced shock. Nationally, total employment in the mining and logging sector is approximately 70% of levels from a decade ago, with only New Mexico outpacing 2012 employment levels. To date, North Dakota and Texas exceed 80% of their decadal levels. However, mining and logging sector employment in all states dropped significantly following the onset of the COVID-19 pandemic in March 2020, and only West Virginia surpassed its pre-pandemic mining sector employment levels. Favorably, however, total nonfarm employment in this group of states—namely, New Mexico, West Virginia, Texas, and North Dakota--recovered from 2020 lows. (References to the mining sector in this report correspond to the North American Industry Classification System [NAICS] 21: Mining, Quarrying, and Oil and Gas Extraction.)
Mindful Spending, Reserve Management, And Forecasting Are Important For Mineral-Producing States' Credit Stability
Even a relatively low direct reliance on oil-related revenue does not insulate a state's budget from the fiscal fallout related to an overall economic slowdown. Amid oil price volatility over the past decade, several mineral-producing states implemented significant austerity measures, resulting in deep budget cuts to state agencies and lower disbursements to local governments. However, in the years following these sharp downturns, states with some reliance on mineral-related revenues undertook budget measures to soften the impact of energy market volatility on state finances, resulting in greater predictability of their revenues.
|Mineral-producing states: general fund expenditure changes (fiscal 2014-2019)|
|Sources: National Association of Budget Officers, S&P Global Ratings.|
Financial tools and management practices in mineral-producing states include implementation of constitutional (or statutory) limits on:
- Recurring expenditure growth relative to revenue projections;
- Prioritizing operating surpluses during good economic times to build rainy day savings;
- Establishing additional reserve accounts to stabilize spending for categories such as education or health; or
- Stress-testing energy-related revenues and using that information to forecast more conservatively.
If sustained over the long term, management practices could, we believe, help mineral-producing states contend with some of the most immediate budgetary challenges of a cyclical downturn and avoid substantial credit deterioration.
Some recent changes include:
- Oklahoma: In addition to building its constitutional and revenue stabilization reserve funds, the state carried forward approximately $1.35 billion in unspent general surpluses from the last three fiscal years, while establishing and committing amounts to its Medicaid Rate Preservation Fund ($495.7 million) and Education Reform Revolving Fund ($531.0 million) at the end of fiscal 2023, which could provide additional liquidity and flexibility for near-term budgetary relief in the event of adverse economic or financial conditions.
- New Mexico: Legislation recently enacted will direct a portion of its severance tax revenue above 2024 levels into its severance tax permanent fund (STPF), beginning in fiscal 2025. The corpus of the permanent fund is restricted, but its growing interest income will be available for general fund appropriations and will help offset current dependence on oil and gas revenue.
Below, we provide a summary of key price and budgetary assumptions among the main mineral-producing states with direct fiscal dependence on mineral-related revenue. Most oil-producing states have revised revenue assumptions based on changing economic conditions over the past three months, while continuing to maintain high reserve levels to buffer against slower economic growth.
|Key data for major mineral-producing states|
|Fiscal 2023 (initial)||Fiscal 2024|
|State*||Rating/outlook||Price assumption at budget enactment ($/bbl)||Price assumption (revised; $/bbl)||Mineral-related revenue as % of operating revenue||Reserves as % of expenditures||Price assumption ($/bbl)||Mineral-related revenue as % of operating revenue||Reserves as % of expenditures|
|*See Appendix for state-specific notes.|
State Economic Snapshot--Mining Sector In Focus
- Alaska's price assumptions are based on its March 2023 forecast. Oil-related revenues as % of operating revenues based on December 2022 Alaska Revenue Sources Book for unrestricted general fund revenues. Reserves (constitutional budget reserve + earnings reserve account fiscal year-end estimated balance) and unrestricted general fund expenditures are based on the state's March 2023 fiscal model.
- Louisiana's data as presented to the Revenue Estimating Conference on May 2022. Reserve estimate for fiscal year 2023 not available at this time.
- New Mexico's reserves are calculated based on recurring expenditures.
- North Dakota's total oil and gas-related revenues reflect estimates prepared by the legislative council. Total available reserves for the biennium include the general, budgetary stabilization, and strategic investments and improvements funds, expressed as % of general fund expenditures. Does not include the state's estimated legacy fund ending balance for fiscal year 2023 of $9.15 billion; the legislature may appropriate up to 15% of the principal and all of the interest of the fund in any biennium.
- Oklahoma's price assumption reflects oil-related revenue only. Combined oil and gas [gross production] revenue reflected in total. Calculation of reserves includes reserve balances in the state's constitutional reserve and revenue stabilization funds, totaling $1.92 billion.
- Texas' oil & gas-related revenues as % of operating revenues exclude federal revenues and other dedicated revenues. In November of each year, a transfer is made from the general revenue fund equal to 75% of the excess of the previous fiscal year net collections for oil and natural gas production taxes over 1987 collections. The transfer amount of each production tax is calculated separately and must be in excess of the 1987 threshold. Reserve levels reflect estimate at the end of the current biennium.
- Wyoming's reserves include the general fund, budget reserve account, legislative stabilization reserve account, and school foundation program balances expected as of June 30, 2024, on an annualized budgetary basis. Oil price assumptions are performed on a calendar year basis. Oil-related revenue % reflects total severance tax collections as a percentage of general fund revenue.
This report does not constitute a rating action.
|Primary Credit Analysts:||Oscar Padilla, Dallas + 1 (214) 871 1405;|
|Thomas J Zemetis, New York + 1 (212) 4381172;|
|Andrew J Stafford, New York + 212-438-1937;|
|Secondary Contacts:||Savannah Gilmore, Englewood + 1 (303) 721 4132;|
|Rob M Marker, Denver + 1 (303) 721 4264;|
|Scott Nees, Chicago + 1 (312) 233 7064;|
|Geoffrey E Buswick, Boston + 1 (617) 530 8311;|
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