“We’re looking at the whole year, not just the fact that things are happening in the market right now.” Greg albrecht, chief economist for the Legislative Fiscal Office
Falling oil prices are dropping prices at the pump but could blow a hole in the state operating budget, if they continue to stay low.
However, state officials said Wednesday that it is premature to start worrying about state government’s ability to fund hospitals, colleges and other services in the budget year that begins Sunday.
“It’s a little early to be overly concerned about it,” said state Sen. Jack Donahue, R-Mandeville and chairman of the Senate Finance Committee.
On the New York Mercantile Exchange, crude oil was at $80.37 a barrel Wednesday afternoon, while Brent oil for August settlement was at $93.59 a barrel after a worker strike in Norway reduced production.
The state collects millions of dollars in royalties from production on state land and severance taxes that are tied to the price of oil and natural gas. The higher the price, the more revenue the state receives.
The current state operating budget is based on oil selling for $96.65 a barrel. In the new fiscal year that starts Sunday, economists projected weeks ago that the price of oil would increase to $102.14 a barrel. More than $1 billion in income is expected from oil and natural gas in the $25.6 billion state budget.
Oil prices were on the rise Wednesday because of booming business at U.S. factories that need energy to manufacture their goods. Still, the prices did not top $100 a barrel.
“It’s a concern,” said Greg Albrecht, chief economist for the Legislative Fiscal Office in Baton Rouge.
Albrecht said the impact on the state budget will be decided by a price average rather than day-to-day fluctuations.
If the average price of oil in the upcoming fiscal year ends up being $101 a barrel, legislators could have to trim the budget by $12 million, he said.
“We’re looking at the whole year, not just the fact that things are happening in the market right now,” Albrecht said.
Slumping oil prices prompted state budget cuts in the past.
In December 2008, a nosedive in oil prices, combined with the recession, forced state officials to cut spending by $341 million. At the time, crude oil was closing at $44 a barrel on the New York Mercantile Exchange after soaring past $140 a barrel.
Donahue said Wednesday that state officials can make adjustments to the oil price forecast, if necessary.
Senate President John Alario, R-Westwego, said he is not concerned just yet.
“It’s too early to worry. We’ve got other worries,” he said.
Besides, Alario said, a drop in prices at the pump often spurs people to spend money elsewhere, with the state benefitting from the economic activity.
“People save at the gas station and spend that money at Walmart. Sometimes, it offsets,” Alario said.