Energy producing states face volatile oil prices

Bloomberg News

A rise in oil prices sparked by the ongoing Middle East conflict could have implications for energy producing states in terms of economic output and revenue.

Since the Iran war began on Feb. 28, prices for West Texas Intermediate crude oil have been volatile, spiking earlier this month to over $114 per barrel, the highest level since 2022. The price was below $70 at the end of February, before Iran was attacked, according to U.S. Energy Information Administration data compiled by the Federal Reserve Bank of St. Louis.

Higher energy prices could temporarily help states that tax oil and gas production, although "the environment comes with added inflationary risks that could ultimately lead to broader economic softness or tip the economic balance toward a slump," according to a March 31 S&P Global Ratings report. 

It said that out of eight energy producing states, the 10-year compound growth rates for Texas and New Mexico were the only ones exceeding the median state rate of 2%, with Alaska, Louisiana, North Dakota, Oklahoma, West Virginia and Wyoming falling below the median. 

"I think the biggest contributor to why outside of Texas and New Mexico, these other states have been such slow growers relative to their peers has more to do with demographics than anything else, and perhaps less-diversified economies," S&P analyst Oscar Padilla said. 

During a period of uncertainty over the Iran conflict's magnitude and duration, the rating agency said it will be watching how the states manage their finances, particularly as they forecast the trajectory of their revenues and balance sheets. 

"These states, these legislatures have learned (from past) boom and bust cycles – the booms are great, but the busts have been pretty problematic, and so have worked to isolate severance tax revenues," Padilla said.

Higher oil prices are likely both a positive and negative factor for some municipal bond issuers, but are not expected to have a significant impact on the municipal bond market as a whole, Cooper Howard, director of fixed income research and strategy at the Schwab Center for Financial Research, said in a market commentary last week. 

"On one hand, it could result in higher revenues due to activities related to the extraction of oil or taxes linked to energy prices," he said. "However, higher energy prices can be thought of as an additional tax for lower income individuals with less financial flexibility."

Howard added that elevated gas prices over an extended time period could cause some consumers to reduce spending, potentially hurting economic growth.

The average price for a gallon of regular gas was $4.042 on Monday, up from $3.15 a year ago, AAA reported.

The effect of rising oil prices is moving beyond energy markets and into state budgets, household finances, and policy debates, according to a recent Tax Policy Center report by Principal Research Associate Lucy Dadayan.

"Oil price swings can reshape state budgets quickly, especially in oil-producing states that rely heavily on severance taxes," the report said. "But even in non-oil-producing states, higher oil prices raise the costs of government services and squeeze household budgets."

Dadayan said a subsequent decline in oil prices can weaken revenue for states with severance taxes, while other states may consider gas tax holidays to ease the pinch on motorists. She also pointed to a relationship between major crude oil spikes and increases in food and beverage inflation. 

"Higher prices can also dampen consumer spending, reducing sales tax collections," the report said. "Even when sales tax revenues increase in nominal terms due to increased prices, they may not keep pace with rising costs (for state governments), especially if consumer behavior shifts."

A survey by the Federal Reserve Bank of Dallas found the Middle East conflict has generated substantial uncertainty for oil producing firms over the near-term.

The Energy Survey released March 25 found rising oil prices were not spurring changes to 2026 oil well drilling plans for almost 70% of big oil exploration and production firms, which make up the bulk of U.S.  production, although almost 60% of smaller firms said they increased the number of wells they expect to drill. On average, respondents expect a West Texas Intermediate oil price of $74 per barrel at year-end.

The Permian Basin, which spans 55 counties in west Texas and southeast New Mexico, is the nation's largest source of crude oil and those states rank number one and two respectively for production. 

Texas' oil production tax generated $2.8 billion through March in fiscal 2026, which began Sept. 1.

Revenue from the tax totaled $5.38 billion in fiscal 2025, down from $6.3 billion in fiscal 2024. The majority of combined oil and gas production tax collections are allocated to the state's foundation school account and state highway and rainy day funds.

Before the Iran war, the Lone Star State lost 300 jobs in oil and natural gas extraction and 600 in support activities between January and February, according to the Texas Independent Producers and Royalty Owners Association.

In fiscal 2025, New Mexico's oil and natural gas severance tax, which raised $2.1 billion in fiscal 2025, backed outstanding severance tax bonds totaling nearly $1.16 billion. The state's severance tax fund ended the fiscal year on June 30 with a $11.7 billion balance.

Moody's Ratings in January upgraded New Mexico's senior lien severance tax bonds a notch to Aa2 and issuer rating to Aa1, citing "the state's well-established and prudent governance practices that have partially mitigated its reliance on volatile severance taxes."

In 2023, the state took action to cap the amount of certain volatile fossil fuel-related revenue flowing into the general fund, transferring the excess to the Severance Tax Permanent Fund starting in fiscal 2025. 

On the political front, Texas may be coveting New Mexico's prolific crude oil production areas, Lea and Eddy counties. Texas Republican House Speaker Dustin Burrows has ordered his chamber to study "the constitutional, statutory, fiscal, and economic implications of adding to Texas one or more contiguous counties of New Mexico" and provide the required state and federal required procedural steps to admit territory from the neighboring state into Texas.

Legislation introduced this year by a New Mexico Republican state representative from Lea County called for a proposed constitutional amendment establishing procedures for the state to consent to the secession of three or more contiguous counties. The measure failed to advance in the Democrat-controlled legislature.

In February, Burrows posted on the X platform a news story about the secession push in southeastern New Mexico with the comment: "Texas would gladly welcome Lea County back to Texas where it rightfully belongs."

In 1841, a Texas-chartered expedition tried to lay claim to part of present-day New Mexico during Texas' brief period of independence, but failed.