The Organization of the Petroleum Exporting Countries (OPEC) and Russia — described together as OPEC+ — announced this week a plan to cut oil production by 2 million barrels a day. The maneuver is understood to be an effort to “push up already-high global energy prices and help oil-exporting Russia pay for its war in Ukraine,” according to the Wall Street Journal.
Higher oil prices mean more money Russia can make selling petroleum to energy export-dependent European nations — many of whom have shuttered or curtailed their own domestic fracking industries. In turn, that additional revenue means more available cash to put toward any number of Russia’s priorities, including the ongoing clash in Ukraine.
And while this decision is being made half a world away, it holds real implications both for Texas’ coffers and the vaunted oil and gas industry that feeds it.
Texas is amidst a period of record consumption tax collections — leading to a massive $27 billion projected treasury surplus and $13.6 billion savings account balance — driven by higher costs across the board for everything from food to houses to gasoline.
In a recent interview, Comptroller Glenn Hegar attributed this tax collection windfall to inflation in all its various forms, which includes supply chain struggles and low domestic oil and gas production.
But, he cautioned, “It cannot continue and don’t count on it to.”
Two and a half years ago, as the world neared widespread government-mandated economic shutdowns, negotiations between Saudi Arabia and Russia to curtail oil production fell through, triggering a production increase by the Middle Eastern country that caused global oil prices to crater.
So far this year, OPEC was on pace to produce over 34 million barrels (bbl) of oil per day. The negotiated drop would put it closer to on par with 2021’s daily production. In March 2020, the OPEC basket was trading around $50; its price would plunge into the negatives, along with all global oil prices, only a month later.
Currently, West Texas Intermediate crude oil prices are in the upper-$80s, down from their triple-digit levels from March through July this year. Per the U.S. Energy Information Administration, domestic crude oil production was at 11.8 million bbl per day in July; it had reached 13 million bbl per day in November 2019.
Texas’ daily production eclipsed 5 million bbl per day in July for only the second time since May 2020. It was consistently close to 5.5 million bbl per day in the months before the pandemic closures set in March.
Both the Permian Basin and Eagle Ford regions are producing less oil per new well than they did a year ago, per the EIA. The total rig count in Texas is up about 120 from 2021, but still a little lower than its 2018 count.
As demand for oil resurges after the government-mandated shutdowns of economies and travel during the pandemic, the U.S. is not keeping pace with its 2019 oil production, let alone the point it’d be at along the trendline in place before the pandemic and presidential administration change.
In response to the OPEC+ announcement, the White House is pining for an ease of sanctions against Venezuela that have prohibited Chevron from ramping up operations in the South American country.
And while demand is rejuvenating, the federal government’s posture toward the U.S.’s energy future has changed drastically. Under President Joe Biden — whose administration has promised to cut U.S. emissions by 40 percent relative to 2005 levels, the goal for which America is already halfway to without any drastic policy changes — federal policy has tried to steer away from fossil fuels without rocking the economic boat that runs on oil and gas.
A recent survey of oil and gas companies by the Dallas Federal Reserve found federal policy and posture to be a disquieting factor for oil and gas development. Government regulations and Environmental, Social, and Governance (ESG) financial practices are causing capital to shy away from new oil and gas investment.
Texas Railroad Commissioner Wayne Christian said of this dynamic in a statement after OPEC’s announcement, “Winter is coming: the U.S. and our European allies need more U.S. oil and gas today—not after the midterm election. OPEC+ and Putin aren’t the answer to our energy security. Harnessing the Permian Basin is.”
“[Biden’s] energy agenda is a disaster, from pleading for more production from OPEC+ to draining the strategic petroleum reserve and subsidizing unreliable wind and solar projects with billions of our tax dollars. The president has unnecessarily put the U.S. at a severe geopolitical disadvantage just for the sake of virtue signaling that he is progressive on climate change.”
Texas, which is the motor inside America’s energy production machine, has tied its own financial future to the oil and gas industry. Consumption taxes, including oil and gas severance taxes, occupy the financial space typically inhabited by income taxes in other states.
The state’s Economic Stabilization Fund (ESF), colloquially dubbed the “Rainy Day Fund” or savings account, is funded by severance taxes and splits them with the State Highway Fund.
As of the July estimate, the state expects to remit $3.58 billion into the ESF by the end of the next fiscal year, which is almost 2.5 times the 2022 transfer. The Texas Oil and Gas Association announced that in September, per the comptroller’s monthly revenue numbers, over $1 billion in severance taxes were collected — $375 million of which is earmarked for the ESF, per statute.
September marks the sixth month in a row eclipsing the $1 billion mark.
These totals are more than double what the state collected in the months before the pandemic, including during the roaring economic months of the last quarter of 2019.
For a compounding effect, since oil and gas fuels transportation and operations all across the country, price increases in those commodities feed into overall inflation — which in turn has affected, and will continue to affect, the various other categories of consumption taxes individuals pay.
Legislators expect to have a windfall of tax dollars in front of them next session both in the treasury balance and in the Economic Stabilization Fund. But Hegar delivered his warning for a reason: the record tax collections are not a sign of an unabatedly humming economy.
State officials often tout that spurning an income tax and relying heavily on consumption tax collections has led to tremendous economic benefit, with all the companies and individuals moving to the state without an income tax as one of its top attractions. But it remains a trade-off: state coffers are more reactionary to economic shifts than they might otherwise be.
With Gov. Greg Abbott promising “at least half” of the $27 billion tranche for a serious property tax cut, and all the other interests that will undoubtedly look to peel off a piece of the windfall pie, there’s a lot of competition already vying for the state dollars.
It remains to be seen how, if at all, this OPEC decision will impact the money state officials see flowing in between now and when a budget is finalized next year. But that, coupled with the continuous stand-off between the state and federal government over the direction of domestic energy policy, is something legislators may account for when deciding how much of this tax windfall to spend and where.
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Brad Johnson is a senior reporter for The Texan and an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who most enjoys watching his favorite teams continue their title drought throughout his cognizant lifetime. In his free time, you may find Brad quoting Monty Python productions and trying to calculate the airspeed velocity of an unladen swallow.