REPORT: Oil Prices, COVID-19 Threaten Colorado Budget, School Spending

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REPORT: Oil Prices, COVID-19 Threaten Colorado Budget, School Spending
From the barrel to the pump: the impact of the COVID-19 pandemic on prices for petroleum products.

**Updated with a statement from Colorado Oil and Gas Association

Deep ongoing concerns with the recent drop in oil prices as well as fallout from the coronavirus (COVID-19) are expected to hit the Colorado economy overall and particularly state education funding according to estimates presented to the state legislature’s budget committee today.

The report prepared by the Legislative Council Staff for the Colorado Joint Budget Committee (JBC) comes just days after the legislature halted the 2020 legislative session over growing concerns amidst the COVID-19 health effects.

Though the legislature has paused for at least a couple weeks—with uncertainty of when or if it will reconvene any time soon—members of budget committee still met to discuss state revenue and budget projections, hearing from state administrative officials on the expected revisions to projections released last December.

“News is changing by the hour,” staff emphasized in their presentation to legislators. “We are at an inflection point, but do not know how far the economy will fall or how long it [COVID-19] will last.”

Combined with the pandemic’s effects on the state’s revenue projections, budget projections were already beginning to account for expected reductions in revenues from oil and gas, and the effect that would have on state education funding in particular.

The change in local share for state education funding from lower oil prices in the legislative council’s December forecast for the next fiscal year, 2021-22, dipped 5.1 percent. Current fiscal year 2020-21 projections remained unchanged.

Legislators pressed for specifics while council staff were hesitant to offer more than projections within a range, and emphasized the high degree of uncertainty given the quickly changing nature of current events and economic considerations, noting that so much has changed in the past week that certainty was in short supply.

They hoped that “early, aggressive measures will help to contain the spread of the coronavirus,” they added, noting that underlying economic forces in 2020 differed from 2008’s recession, “giving the economy a chance to reboot by the end of the [calendar] year.”

They praised the “resilience, innovation, and strong economic fundamentals entering March” that would help counteract the expected downturn.

But Department of Education budgeting projections from budget committee staff member Craig Harper revealed real concern for revenues overall, in the short term. Tax revenues are projected to decline.

“[S]ales tax, income tax, federal mineral lease, probably anything but marijuana,” would drop Harper said. He noted that legislators only needed to look at the window to see the reduction in demand by observing less foot and vehicle traffic around the Capitol building.

“There is risk on the revenue side for all of the sources that you may want to be ready to deal with,” Harper continued.The March report highlighted the importance of use tax revenues and capital investment, which is especially important for oil and gas industry production.

“Use tax revenue is largely driven by capital investment among manufacturing, energy, and mining firms. Use tax collections surged during FY 2018-19, growing 11.5 percent to total $345.5 million on the strength of a recovering energy industry,” the authors wrote. “However, capital investments have fallen this fiscal year. Revenue is expected to reverse course and decline during FY 2019-20 and FY 2020-21 by 43.9 percent and 5.0 percent, respectively, before recovering with 16.5 percent growth in FY 2021-22.”

Global oil prices have plummeted in recent weeks, which the report was already beginning to account for in its projections.

“Oil industry capital expenditures have slowed on tight credit conditions and weak global demand. Recent price shocks will continue to reduce use tax collections from the energy industry,” they continued.

But how big a downturn remains to be seen, analysts said.

“There will be lower production in 2020 than 2019, but the severity of the contraction is difficult to predict,” according to the report.

According to the analysts, the downturn comes as the industry entered 2020 in a position of strength, riding a tailwind of production and technological achievement, along with low unemployment in production areas on the state’s Front Range.

With unemployment rates hovering between 2.4 and 2.6 percent, oil production growth through October 2019 was 5.6 percent for Weld County, the epicenter of Colorado’s oil output.

“Oil production in the northern region, particularly in Weld County, has dominated statewide production for over a decade. Oil production climbed through October 2019, increasing 5.6 percent after increasing by a robust 36.0 percent in 2018,” the report said.

“With oil prices falling to around $32 per barrel in March, the energy sector faces significant headwinds, as this price would not likely be able to cover production costs. It generally takes six months for a fall in oil prices to reduce production. It is impossible to forecast the full extent of the impact on Colorado energy producers at this time. Oil and gas producers face potential closures in the months ahead, since debt levels are already high for many and credit has been tight,” they added.

Colorado’s recent record levels of production mirrored other resource rich states.

“U.S. crude oil and natural gas production continued to increase in 2019. This boom is due to increases in production from tight rock formations and new technologies, such as horizontal drilling and hydraulic fracturing. U.S. crude oil production increased 17 percent in 2018 and increased further in 2019 by 11 percent. Texas, New Mexico, and the Gulf of Mexico contributed the most to these gains; however, Colorado set a record in 2019 with estimated production of 514,000 barrels per day,” the report added.

**Update:
“The global economy sits on the brink, given the pandemic we’re facing, and our leaders need to be doing everything they can to make sure companies across the board aren’t going bankrupt and laying off thousands of employees. The best thing our state can do is identify areas where support is possible, and to make sure whatever actions they take, they don’t unjustifiably harm Colorado businesses or working families.” Dan Haley, Colorado Oil and Gas Association.

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