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There has been a lot of attention paid to the harm that the oil industry is experiencing in the face of declining oil prices, but there has been little talk about how strained state budgets may become due to lower oil tax revenues.

Several states in the U.S. that are overly dependent on oil to meet their budget forecasts are starting to come to grips with the fact that their spending plans may not work in a low priced environment. Oil prices have dropped by more than 30 percent since the summer, with聽WTI prices聽dropping below $75 per barrel in the third week of November.

That has officials from several states, namely Texas, Alaska, Louisiana, New Mexico, North Dakota, and Oklahoma, scrambling to make the math work. Alaska in particular will see a gaping hole between what it forecasted for revenue collections and what it will ultimately be able to collect. That is because it relies on oil taxes to聽meet 89 percent聽of its collections. (Related:聽Election Results Good News For Keystone XL Pipeline)聽

Even worse, some states were much more optimistic about oil prices than others, setting their budgets up for a big disappointment. For example, Alaska鈥檚聽budget assumed聽that oil prices would average $106.61 per barrel for the year, and $105 next year. With actual prices way off from that, Alaska may need to make some dramatic revisions to its spending plans.

For now, state officials from Alaska are maintaining that this isn鈥檛 something the state can鈥檛 weather. 鈥淥ur state is not in a situation of deficit spending and in no danger of being in one,鈥� John Tichotsky, the state鈥檚 chief economist, told聽Bloomberg聽in an Oct. 28 interview.

Texas, the largest oil producer in the U.S. by far at 3.1 million barrels per day (as of August 2014), is in much better shape. While it has more to lose, Texas has a much larger and much more diversified economy than other oil producing states. Oil revenues only make up about聽8 percent of its tax take.

Not only that, but after experiencing a massive bust in the 1980鈥檚 when oil prices tanked, Texas has since decided to divert much of its oil revenues to a聽rainy day fund, meaning not only has it built up cash reserves since then, but it also doesn鈥檛 design its annual budget around short-term fluctuations as much as it could. Even better still, unlike Alaska, Texas drew up its latest budget on very conservative oil price estimates 鈥� about $82 per barrel for 2014, and $80 per barrel in 2015, not too far off from current prices.

But not all states are as well positioned as Texas. Louisiana is selling more debt in order to cover the聽unexpected shortfall. It offered $200 million in bonds, enough to cover a mid-November revision of its lower-than-expected budget revenue. The state is expected to take in $171 million less than originally projected through June 2015.

New Mexico is also in the line of fire. It may take in $100 million less than anticipated, which could prevent hoped-for tax cuts. 鈥淲e think the budget is simply not going to be big enough to accomplish major tax reform,鈥� New Mexico鈥檚 Finance and Administration Secretary Tom Clifford,聽said on November 19. (Related:聽GOP Has Big Plans For Energy, But Are The Numbers Right?)

And it is not just U.S. states that are feeling the pinch. America鈥檚 massive oil producing neighbor to the north is also taking a hit. The eastern province of Newfoundland and Labrador might be the most exposed, as it is already running a deficit,聽according to Moody鈥檚 Investors Service. Lower revenues will exacerbate its budget woes.

Alberta could聽weather low oil prices better than others, despite making up the lion鈥檚 share of Canadian oil production. That is because it built up cash reserves during good times. Still, the drop in oil prices is inflicting real pain. The聽province loses $215 million聽in revenues for every $1 drop in the price of a barrel of oil. Alberta鈥檚 Premier reiterated that the province will balance its budget even with low prices, but聽warned聽that 鈥渢his is not business as usual.鈥�

In an聽address聽on November 15 he said 鈥淲e need to steel ourselves. We will face this challenge together.鈥� He went on to add, 鈥渋f we are in a low-price environment for an extended period of time鈥� there will be consequences, clearly.鈥�

By Nick Cunningham of Oilprice.com

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