Low Oil Prices Drain Some But Energize Most Local Economies

The impact of oil's price drop depends on how much a local government relies on the oil industry for revenue and jobs.
by | February 27, 2015

The dramatic drop in oil prices will be a drag on some local government’s health but overall, experts say the price drop will dump a welcome infusion of cash into local government coffers.

During the last six months of 2014, oil prices fell by some 44 percent while the average gasoline price fell by 30 percent in the U.S. That means that for local governments that depend on the oil industry, growth will slow to nearly a standstill.

Not all local governments in the major oil-producing states -- Texas, Wyoming, North Dakota, Alaska, Louisiana, Mississippi, Montana, New Mexico and Oklahoma -- will be affected negatively, however. It depends on how much of the locality’s revenues are related to the industry. Oil extraction is expected to continue so the local economy will still grow, but new drilling should slow in 2015. That means a related slowdown in employment (layoffs have already begun in these states), hotels and restaurants, retail and construction and other related businesses. An analysis by Fitch Ratings last month noted that cities will feel the impact in reduced sales tax receipts, building permits and other economically sensitive revenues.

In North Dakota, Montrail County’s auditor said the oil price drop has had the biggest impact on the county’s public utilities, which include pipelines and refineries. Cash flow has slowed, said Stephanie Pappa, although it hasn’t reached worrisome levels yet. And the inflated property values -- thanks to the oil boom -- are still helping prop up property tax collections to keep up the roads that have been battered by a swelling population. Mountrail doesn’t have a reserve fund but it does have money stashed away in CDs. “So if something drastic happened,” Pappa said, “we still have that money to fall back on. But if that wasn’t enough, we’d have to start laying off people.”

Credit rating agencies have noted the varying impact that the oil price slump will have even within states. In Texas, for example, a Moody’s Investors Service report noted that Houston and Harris County are particularly vulnerable, as are localities in the Permian Basin (West Texas) and the Eagle Ford Shale area of southern Texas. Ten of Harris County’s top 11 employers are oil and gas-related while five of Houston’s top ten are. In West Texas, three of Midland’s top ten employers are oil and gas companies and its top two taxpayers are also industry-related.

By contrast, cities like Dallas and San Antonio are expected to escape relatively unscathed. In Dallas, transportation and finance are the main industries while healthcare and defense reign in San Antonio.

Across the country, most local governments will see positive effects, mostly due to lower costs to operate fleet vehicles and for those that collect a sales tax, a revenue bump from increased consumer spending. In particular Phoenix, Ariz., and Nassau County, N.Y., are expected to benefit as both have an outsized reliance on the sales tax for revenue. In fact, Nassau has been dinged by credit rating agencies in the past for its over-reliance on the tax combined with optimistic expectations about how much that revenue stream will yield.

Many Ohio localities also issue a sales tax and are expecting an uptick in revenue. In Franklin County, County Administrator Ken Wilson said so far sales tax collections are up 7.5 percent over last year. And because collections are on a three-month lag, he expects that figure to grow even more to account for the more recent trend in fuel prices. The county is saving money on gas too -- Wilson has reduced the general fund budget for fuel by $210,000. Franklin is using about half of the savings to start a reserve fund for hybrid vehicles that will help county agencies offset the additional upfront cost of buying the more fuel efficient cars for their fleet.

Increased sales taxes will also help out transit agencies that have support from them like Dallas Area Rapid Transit and Atlanta’s Metropolitan Atlanta Regional Transit Authority, the Moody’s report said. However many more will see negative effects as travelers leave seats empty on buses and trains and choose to drive to their destinations instead. Still, the report concludes, the majority of local public finance sectors will be benefitted by the drop in oil prices.