Over the past few months the price of oil has dropped to its lowest in half a decade. We haven’t seen the price of crude oil fall below $50 per barrel since May of 2009. But the fact of the matter is prices for oil are at a low right now. Some have predicted the price of oil will see an upswing sometime between 4th quarter and early 2016, depending on who you believe. Huge factors in the price of oil can be contributed to OPEC and oil production in Saudi Arabia.
With the drop in prices will the Texas oil boom be affected? It really is going to affect individual projects differently, depending on whether the price of oil drops and holds below the “breakeven price” for each project. The “breakeven price” is the price per barrel that a well can sustain to produce a reasonable return.
In the Eagleford Shale some wells can continue to produce with prices dropping as low as $40 per barrel with the average being roughly estimated at $50 per barrel and the high being $60 per barrel. Since the price is currently around $50 per barrel some operators in the Eagleford area have already halted production and have scaled back drastically on exploration. The prices have also affected other shales in the areas similarly. According to the Baker Hughes rig count for Texas in the last 4 weeks the rig count has decreased by 163 rigs. During the same time frame for 2014 there was an increase in rig count by 7 rigs. That is a drastically different figure in terms of revenue generated from Texas’ oil production tax.
Texas collects revenue from oil production. We went to a website called texastransparency.org to view where oil production was in terms of revenue source for Texas. This is a website created by the Texas Comptroller of Public accounts that shows detailed information about the state spending. Based on the graph provided by the Texas Transparency website the Oil Production Tax in Texas accounts for 3 percent of tax revenue. That is almost 3 billion dollars in generated revenue based on oil production.
Just to give you an idea of how far 3 billion dollars goes in the Texas budget we took a further look at the Texas Transparency website to view spending by category and noticed that Texas state expenditure information for the Texas Department of Transportation construction in progress and highway network expense category totaled 4.7 billion dollars. The 3 billion dollar Oil Production Tax gathered by the state is equivalent to almost 63 percent of TxDOT’s construction in progress and highway network expenses.
The economy in Texas will be affected by the drop in oil prices. Since this is just the beginning we can’t really predict how drastically this will affect the Texas economy. However, just based on the scale of revenue that the Oil Production Tax generates there will be repercussions based off the decrease in revenue generated by the lucrative tax.