Seismic Activity Could Affect the Future Revenue Stream of Oil and Natural Gas Producing States

A recent article in the Wall Street Journal addressed the state-imposed limitation of fracking operations in Ohio. Geologists there are beginning to make a direct correlation between shale fracking operations, which involves injecting fluids deep underground, and low-level seismic activity detected in the local area. In the case of Ohio, several drilling sites have been ordered to close as a result.

On the federal level, a report by the McKinsey Global Institute predicts that between now and 2020, shale gas and oil production, using fracking, will add between $380 billion to $690 billion (or two to four percentage points) to America’s annual GDP. At the state level, the use of hydraulic fracturing technologies to tap huge, previously inaccessible petroleum deposits has turned many mediocre state economies into mega-wealthy ones. This boom in production and the resultant monetary windfall create a profound economic dependency in the many states where this technology is used. Fracking has also allowed these states the ability to pass favorable legislation for their residents and businesses, including aggressive tax reform policies.

But one cannot help imagining the potential consequences of further limiting fossil fuel production sites based on farther-reaching geological studies. This is particularly true in larger oil-producing states that are even more dependent on revenue from their energy sectors. Could reductions in output due to further negative reports affect the current and future tax reform proposals in those states? They clearly can.

In most states where tax reductions (such as a decrease in personal income tax, corporate tax, or sales tax) are proposed, the burden falls on the proponents of the measure to come up with alternative ways to bridge the revenue shortfall. Several critical items must addressed and clarified. For example, how will all social services be paid and revenue neutrality be achieved at the same time? Generally speaking, this is done by increasing consumption taxes. These increases may include property taxes, state sales taxes, or simply the expansion of the number of items that weren’t subjected to taxation before.  Opponents then point to the added financial burden this will place on the poor, who would derive no benefit at all from a tax reduction. So governors and legislators must be armed with convincing, irrefutable data showing the long-term benefits to the state by reducing taxes, like those outlined in How Money Walks.

In oil-producing states, it is a totally different story. To varying degrees, taxes and royalties on oil production cover all or part of the budgetary items, and in many cases, produce a revenue surplus. Even in the face of opposition, results like this make the case for the passage of further tax reductions on businesses and state residents far less risky and more palatable to all parties concerned.

The Ohio story is one case, but there are similar stories coming from Oklahoma, Arkansas, Ohio, Texas, and Colorado. While reductions in petroleum output in Ohio will certainly be detrimental to the state’s economy, closing the tap on selected wells in the three largest oil-producing states in America, namely Texas, North Dakota, and Alaska, could cause devastating financial repercussions. In these no- or low-tax states, oil tax revenues from fracking are the mainstay of their economies. Rapidly booming oil revenues are the budgetary safety net pointed to when tax reductions were being considered. So, any real or perceived loss of revenue due to environmental causes could eventually mean the reevaluation of some existing tax cuts, and the shelving of the others being considered.

We are certainly nowhere near the point where one published event like this should set off alarms. The oil boom is clearly alive and well. Budgetary revenues in oil-producing states are increasing, and further tax reform proposals are marching on through legislatures. But we need to remember that we are at a point where environmental groups are not enamored with the industry or fracking technologies, and they carry greater influence. Therefore, further studies are inevitable. This story from Ohio serves to shed light on the precarious nature of the industry and the significant ripple effect any interruption could have, right on down to the local taxpayer.