Analysis by the father of American Geopolitics Dr. Daniel Fine, MIT.

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Copyright © 2014 Albuquerque Journal

The huge drop in crude oil prices since September is a double-edged sword for New Mexico that provides welcome relief at the pumps for consumers but puts the state’s seven-year production boom in jeopardy.

And any slowdown in New Mexico output will affect everybody, since nearly one-third of state revenue comes from the state’s oil and gas production.

For now, industry experts aren’t projecting a new bust cycle in the Permian Basin in southeastern New Mexico, but rather a marked reduction in growth. But if prices remain depressed, or decline further, it could begin to reverse one of the longest-running booms in the New Mexico Oil Patch since the 1970s.

“We’ve crossed the break-even point on prices for most New Mexico producers,” said Daniel Fine, associate director at the New Mexico Institute for Mining and Technology’s Center for Energy Policy. “Much of New Mexico’s small-cap and independent producers are at risk.”

Even if current production levels remain steady, dropping oil prices and slower growth will have a significant impact on New Mexico’s finances. In August, state officials projected $285 million in “new” money for the fiscal year that begins next July, mostly from oil and gas revenue.

“The state budget will take a big hit, because those projections were based on oil at $95 per barrel,” Fine said.

There is, of course, a thick silver lining for consumers. Average prices for unleaded gasoline fell on Thursday to $2.92 per gallon nationally and to $2.77 in New Mexico, according to AAA. If those prices hold, it would save U.S. consumers about $61 billion at the pumps next year.

map templateTipping point

Fine, who was recently appointed project leader for state energy policy, said the tipping point between profit and loss for newly drilled wells is $70 per barrel. Benchmark West Texas Intermediate is trading at about $77 per barrel, down from about $100 this summer.

But New Mexico producers receive up to $12 per barrel less for the Midland Sweet Sour that comes from the Oil Patch, largely because of higher costs from bottlenecks in transporting the crude to refineries.

“For small, undercapitalized – or low-cap – oil and gas producers in southeastern New Mexico, the price has crossed the tipping point,” Fine said.


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