Fitch Sees More Challenges for Energy States

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PHOENIX — Alaska, North Dakota and Wyoming are the states most "in the crosshairs" with energy revenues likely to remain low well into next year, Fitch Ratings said Tuesday.

The rating agency’s commentary came with crude oil prices in the $40- to $50-per-barrel range after being above $100 as recently as 2012. States with economies that rely heavily on the energy industry have felt the pinch, particularly Alaska which is juggling options to close a multi-billion dollar budget gap.

“Stagnant commodity price trends are dampening energy states’ economic growth and are eating into economically sensitive revenue sources such as sales and personal income taxes,” said Fitch senior director Marcy Block.

“States with more diverse economies and revenue resources should be able to weather prolonged commodity price declines more effectively than those states that rely more heavily on commodity production,” the Fitch commentary continued. “This means states like Alaska, North Dakota and Wyoming are more directly in the crosshairs of this trend.”

Natural gas prices are likewise low, and many energy-producing states have seen a drop in the number of oil and gas-producing rigs operating inside their borders. Texas has fallen from some 900 rigs to fewer than 400, Fitch data showed, while Wyoming, California, and North Dakota also all had the rig total fall by half or more. Many states incorporate crude oil price forecasts in their budgets, and most states are expected to miss those targets, Fitch said. Alaska, Colorado, Louisiana, and Texas all incorporated crude oil price forecasts exceeding $60 per barrel, while Fitch expects prices to remain low well into the next year.

The commentary also points out that energy-reliant states suffer from employment and other economic woes as a result of the depressed energy sector. Alaska, for example, has laid off hundreds of state employees and Royal Dutch Shell announced two weeks ago that it is giving up on its $7 billion drilling efforts in the Alaskan Arctic after its first well yielded disappointing results. Fitch noted that the Texas comptroller reported that state sales tax revenue in August 2015 was down 0.4% year-over-year due to reduced receipts from the oil and gas-related sectors.

But despite the dire circumstances, Fitch said states still retain considerable budgetary flexibility.

“While these vulnerabilities to commodity markets exist, the states as a whole generally have extensive financial flexibility to adjust to changing conditions and an extensive record of doing so,” Fitch said. “Moreover, those that receive significant revenues from commodities often maintain sizable reserves to offset transitory changes in resource-derived operating revenue. However, if an extended slump in commodity markets continues into fiscal 2017 and a long-term impact to state revenues becomes evident, Fitch would expect the impacted energy states to identify fiscally prudent strategies to address a persistent low revenue scenario.”

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