Why Energy States Face Prolonged Woes

BRADENTON, Fla. – Energy-producing states affected by two years of deterioration in natural resource prices can expect continued global headwinds to pressure revenues, according to Fitch Ratings.

Commodity prices will continue to crimp the collection of severance taxes and related revenue sources, while personal income and sales tax collections will remain suppressed, prolonging fiscal pressures in affected states, Fitch said in a report Thursday.

"Despite an anticipated loosening of federal environmental oversight to promote increased development and the currently positive crude oil price trend, the commodities remain subject to headwinds from global market forces," said the report co-authored by analysts Marcy Block and Rob Rowan.

Those forces include a glut of crude oil, an international commitment to reduce coal use as a means to combat climate change, and increasing use of renewables for energy needs, they said.

Louisiana experienced a 25% reduction in the production of coal, natural gas, and crude oil from 2012 to 2014, the largest drop of the 15 states named in Fitch's report.

The second-largest production drop was in Kentucky, at 14%, where coal mining took the biggest hit in the state's energy production portfolio, according to Fitch.

Other states vulnerable to changes in production during the two-year period were Alaska, Wyoming, Arkansas, California, Colorado, New Mexico, Illinois, West Virginia, Oklahoma, Texas, Ohio, Pennsylvania, and North Dakota.

Fitch said weaknesses due to price and production shifts among the states contributed to several Issuer Default Rating downgrades in 2016.

Alaska was downgraded from AAA to AA-plus; Louisiana's rating was lowered from AA to AA-minus; and West Virginia was downgraded from AA-plus to AA.

Negative outlooks were also assigned to Alaska, West Virginia and Oklahoma, reflecting lingering challenges in maintaining strong fundamental financial flexibility in a prolonged low price environment, analysts said.

Unemployment has increased in some states as a result of energy production shifts, they said. The largest increase occurred in Louisiana, where the jobless rate rose to 6.3% this October from 5.5% in January 2014.

Cash-strapped Louisiana recently disclosed that the state encountered a $313 million deficit when the fiscal 2016 books were closed.

Gov. John Bel Edwards delayed announcing budget cuts to cure the deficit until later this month, in order to continue negotiations with lawmakers over where the cuts will be made.

In addition to reduced oil and gas tax collections, Louisiana revenue from sources such as corporate taxes has declined.

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