Watch Out Below!

Falling crude oil prices are at a two-year low, and some analysts see the bottom coming up quick, which makes for a sketchy financial picture for Louisiana.



Greg Albrecht, the Legislature's chief economist, calls it a "recipe for worry," all those press releases, media accounts, real-time tickers and 24-hour news cycles. An update on the nation's topsy-turvy crude oil prices is always a click away, offering all the drama of a miracle Saints season, especially lately. Prices unexpectedly dropped below the magical $50 barrier earlier this month, followed by what appeared to be a notable rally. But some of the more dire projections have the trend continuing downward to the $40 or $30 range this year before it finds resistance.

That's an obvious threat to Louisiana's recent wealth, which was built largely on oil prices that topped $70 last year. Albrecht says the state is following the situation closely. "It's all speculation, but we all do it and that's how oil prices work. It's cyclical," he says. "But we have accounted for prices being below $50 for the second half of the fiscal year (Jan. 1. through June 31). When we made that forecast back in December, everyone thought we were being too conservative. Some people I thought I was being goofy."

The state currently has $1.3 billion in the bank, a staggering figure. "We've never seen that much in there," says Deputy Treasurer Jason Redmond. But it's only because the Legislature opted out of cashing in during a December special session, when there weren't enough votes to lift a constitutional spending cap. When lawmakers return for a regular session in April, the money will be back up for grabs, especially with elections looming -- as long as crude oil prices don't rain on the parade.

If prices drop below the $50 mark, Albrecht says the state's financial forecast will have to be revised by the Revenue Estimating Conference in May. And for every $1 per barrel the state deducts from its forecast, the budget will shrink by upwards of $13 million, he says. That means lawmakers may have to be more conservative than usual in how they spend the state's money this spring. In Louisiana, where oil is king, anything in the $30 or $40 range would be significant. "At this point, I don't feel it's unreasonable. I wouldn't say it's completely crazy with the way oil prices work," says Albrecht, adding his five-year forecast has oil prices sticking in the $40 area through most of 2010.

Crude oil prices fell below $50 a barrel during the second week of January, its lowest level since May 2005. The drop followed news of a significant rise in crude stockpiles. The dip was cut short by cold weather in the northern United States, a continuing factor that could play out several different ways. International politics intercede as well -- if China and India enter a recession, or anything close to it, reduced demand would push crude oil prices downward.

The weather, in concert with the aftereffects of the 2005 hurricane season, has placed power in the hands of buyers. In response, sellers are lobbying the Organization of Petroleum Exporting Countries, also known as OPEC, to cut production in an effort to pick up prices, but the group's major producers aren't budging. Predicting oil futures is a difficult gig, given the trends, money managers and other players involved.

Don Briggs, president of the Louisiana Oil and Gas Association, believes some economists may be crying wolf. Consumers are enjoying lower prices at the pump, at least for now, and few expected oil prices would exceed the $77-per-barrel peak seen in July. Natural gas prices are still holding strong, he adds, and it's too early to fear an impact on exploration or tax revenues. "It's just not a real concern, yet," Briggs says. "If we get down to $40, that would be horrible, but we'll handle it. We're an industry that responds to oil prices. And I don't think OPEC would let it get any lower than that."

Dan S. BornŽ, president of the Louisiana Chemical Association, says his members use insignificant amounts of oil in their operations; they pay much more attention to natural gas prices. Additionally, refineries are expected to lift their operations to the highest level in two years during 2007.

"From the chemical point of view, lower energy prices always equate to lower raw material costs," he says. "So, as a general observation, this could be favorable for us as long as it doesn't impact natural gas prices."

Despite the positive spin, Albrecht and others warn that $30 or $40 crude oil prices could very well be on the way. Anything can happen, but for now, it's all a waiting game as prices rise and fall in real time over the Internet and airwaves.

"We'll be tracking this monthly from the state's point of view," Albrecht says, "but I'm watching it daily from my office. It drives me crazy sometimes."

The larger political question for Louisiana is, even if Albrecht does catch a potential falling wave of prices and makes the fix in his official state forecast, will lawmakers heed warnings for a more conservative approach?


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