Biden’s Pause on Oil Leases Could Squeeze State Budgets

The handful of states that see substantial revenue from oil and gas production could lose funding because of the Biden administration’s pause on new drilling leases on federal lands.

As part of a set of executive actions to address climate change on Wednesday, President Biden temporarily halted the leasing program. Environmentalists and many Democrats cheered the move as a significant step to addressing climate change and protecting public lands. But it also raises questions for the budgets of some western states that count on billions of dollars in revenue from the industry.

Wednesday’s order applies only to new leases on federal lands. The order does not specify how long the pause will continue.

The Bureau of Land Management, an agency within the Interior Department, auctions oil and gas leases quarterly. Several economists said the order would likely not have a significant near-term impact on states, though that could change the longer it stays in effect. 

“If it’s just a couple months, it’s probably not a big deal,” Wenlen Liu, Wyoming’s chief economist, said. “But if it’s long term, it will have a devastating impact on Wyoming’s revenue.”

Of the 1,840 new leases issued in fiscal 2019, 1,050 were in Wyoming.

A University of Wyoming study, conducted by energy economics professor Timothy Considine and funded at least partially by the state’s energy commission, projected Wyoming would lose more than $300 million in average annual tax revenues if a leasing moratorium was in place for the next five years.

Republican leaders in the state, including Gov. Mark Gordon and Sens. John Barrasso and Cynthia Lummis, slammed Biden’s order. 

Gordon called it “disingenuous, disheartening and a crushing blow to the economies of many Western States, particularly Wyoming.” Barrasso and Lummis cosponsored a bill with two dozen other Senate Republicans to reverse the ban.

New Mexico, which would lose out on nearly $950 million a year in the five-year timeframe Considine looked at, was the only state that would take a bigger tax revenue hit than Wyoming based on the professor’s estimates. Considine’s study also included Colorado, Utah, North Dakota, Montana, California and Alaska. In total, the eight states could lose $8.1 billion over the five years, according to the report.

While the potential loss of revenue has raised concerns, officials are still in the process of determining just what the pause will mean for their states. The ranking Republican on New Mexico’s Senate Finance Committee, Bill Sharer, declined an interview request Thursday because he was busy being briefed on the issue.

“It’s just too early to tell what the bigger impact will be,” said Henry Gomez, a spokesman for the New Mexico Department of Finance and Administration. “But it is something that the state needs to review, and hopefully the federal government is analyzing the economic impact as well.” 

Oil and gas royalties account for nearly one-third of recurring state expenditures in New Mexico, Gomez said. About half the state’s oil and gas production is on federal land, according to a 2018 legislative fact sheet.

The reaction from western Democrats, who have largely supported policies to address climate change, was more positive, though they still noted the possible fiscal implications.

New Mexico Gov. Michelle Lujan Grisham, a Democrat, praised the Biden order in a Wednesday statement. She said government must prioritize climate change, but also supported “a balanced national policy that acknowledges and incorporates the important lessons from an all-of-the-above energy state like ours…that, crucially, takes into account the individual circumstances and near-term financial reality of states like ours.”  

Fellow-Democrat, Colorado Gov. Jared Polis also released a statement supporting much of the order and committing to working with the administration on a review of energy policy. 

“As long as the review is completed expeditiously we don’t expect an economic impact in the short-term,” Polis said.

Chance to Diversify

Even without the leasing pause, oil-rich states have seen declining revenues from the sector recently. Last year, with global demand and prices down, was especially difficult. 

Oil has traditionally been the main source of revenue for Alaska, but that has been shifting in recent years, said Ted Hampton, a vice president with Moody’s Investors Service and an expert on the state's finances.

“The challenge Alaska faces in any event is adjusting to a revenue base that is somewhat different from the oil-dependent approach that has predominated since production began on the North Slope in the 1970s,” Hampton explained

Recent trends show states that depend on oil and gas revenues should be looking for ways to break that dependence, said Lucy Dadayan, a senior researcher with the Urban-Brookings Tax Policy Center. As the country moves away from fossil fuels and toward renewable energy sources, reworking public budgets to reflect the change could also be beneficial. 

“Probably, these states should be looking at diversifying in general,” Dadayan said. “States should be looking into the future rather than holding onto an oil industry that is not sustainable in the long run.”

The pause could have some positive effects on state economies, too. 

Only about 35% of federal land leased to oil and gas developers is actually under production, according to an analysis by conservation group The Wilderness Society. But even idle sites can’t be used for outdoor recreation – a booming industry in many of the same western states with substantial oil and gas reserves.

The pause could open the door for more federal lands to be used for hiking, hunting, fishing and other outdoor activities, said Marne Hayes, the executive director of the coalition Business for Montana’s Outdoors.

“We should be elevating the other positive benefits of the economics of public lands in this conversation, and one of them is outdoor recreation,” she said, adding that the $2.5 billion industry accounts for 5% of Montana’s economic output. 

“If we’re making sure that all these public lands aren’t tied up in unproductive oil and gas leases, then what are the opportunities for these public lands to be managed in other ways that open up access to recreation, in ways that then would contribute to that industry?”