Oil and Gas Account for One Out of Every Six Dollars Paid into the Texas Treasury

The Texas Taxpayers and Research Association (TTARA) released a report last week showing how the Texas Rainy Day Fund – a fund created in 1988 solely funded by oil and natural gas severance tax revenue – is expected to continue to grow thanks to oil and gas production levels.  The Rainy Day Flood: What Oil and Gas Comeback Means for Texas documents the significant increase in oil and gas activity and the corresponding growth in revenue for the Rainy Day Fund.

According to the report,

“seventy-five percent of any oil and gas taxes collected in excess of the amount the state collected in 1987 ($532 million for oil and $599 million for natural gas) are reserved for the Rainy Day Fund. In 2013, the state collected $4.5 billion in oil and gas taxes, of which $2.5 billion will be deposited into the Rainy Day Fund.”

The fund has seen the most growth in the last few years, thanks to the shale boom occurring in the Eagle Ford, Barnett, and Permian Basin plays.

Regarding the Rainy Day Fund the TTARA further reports:

“During its life, in only 5 different years has money failed to flow into the Rainy Day Fund, and the last time that happened was 13 years ago. Over the last eight years, the average annual deposit has been almost $1.4 billion.  With the renewed growth in Texas oil and gas activity, those numbers could be left in the dust. Over the next several years, Texas is on a course to deposit over $20 billion into the Rainy Day Fund—an average of over $3 billion annually, setting new records each year—and that is based on a conservative estimate of world petroleum markets and oil and gas activity in the state.”

According to projections, the Rainy Day Fund should produce record-setting balances in the next few years – and again, thanks to technological advancement in the oil and gas industry.  While some observers in Texas and elsewhere assumed the oil and gas industry had peaked decades ago, the state’s oil and gas industry today faces a resurgent future that will shape economic and tax policy for years to come.

As Texas Railroad Commission Chairman Barry Smitherman said this week, “This year we are likely to issue more drilling permits for oil than we have since 1985.”  He noted that drilling permit applications are approaching their highest level in nearly 30 years, at the same time as oil production continues to rise – proving once again that the oil and natural gas industry is making history in the United States, and perhaps most predominately in Texas.

Smitherman continued by saying that daily oil production in Texas has surpassed 1.8 million barrels and is on track to reach three million barrels in 2017, possibly reaching four million barrels by 2020.  “If we got to 3 million or 4 million barrels per day, we suddenly are in the club of the biggest producers in the world,” Smitherman said.

Even at current production levels, Texas would rank among the top dozen nations on earth in daily oil production.

Thanks to hydraulic fracturing and horizontal drilling, fields that were once uneconomical are producing at levels higher than ever.  The Permian Basin is now producing about 900,000 barrels per day, higher than current Eagle Ford levels. However, Eagle Ford output is likely to jump above 900,000 barrels per day next year, based on permit applications and drilling results, according to Smitherman.

As the TTARA report points out, growth of oil production in Texas is more about technology than prices, a far cry from decades past:

“Unlike past booms, the current momentum of the oil and gas industry is not so much based on the prospect of rising prices. Oil prices today are about the same level they were five years ago. Instead the increase in production is based on the application of cost-effective new technologies, and should be sustainable for years to come.”

After a busy Legislative session, Texas voters will get the chance in November to vote on an amendment that will set aside $2 billion from the Rainy Day Fund for water infrastructure, and next November they will vote on $1 billion to be used for transportation projects.  The decision to tap into the Rainy Day Fund has been a hotly debated issue amongst the Texas legislators, many who believe the fund should be left untouched in case of an emergency.

According to TTARA, “While the Legislature is asking Texas voters to weigh in on using some portion of the fund or its revenues to help fund the state’s infrastructure needs, those additional uses should not threaten its financial vitality.”

TTARA’s report suggests the fund would reach its maximum of 10 percent of the budget — or $16.1 billion — by 2017 if both of the constitutional amendments fail. If the amendments pass, the fund would still have $11.6 billion.  In 2020 the fund is expected to reach $20.2 billion if both amendments fail, and if both amendments pass the fund would still have $17.3 billion.

There is a possibility that annual oil production could ultimately triple by 2020, after already doubling, leading annual severance taxes to exceed $9 billion and deposits to the Rainy Day Fund could top $6 billion a year.

As we see in the TTARA report, almost one in every six state tax dollars – $7.2 billion in 2013 – paid into the Treasury is from an oil and gas production or related services.  With the continued increase in oil and gas production, the oil boom in Texas seems to be just beginning.

Indeed, thanks to the boom in oil and natural gas production in the state, Texas has the unprecedented ability to fund critical infrastructure projects and keep a very healthy Rainy Day Fund balance simultaneously.  So next time you hear some activist railing against “fracking”, you might want to remember this happy reality.  You might even want to remind them of it as well – and ask why they oppose fiscal responsibility.

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