Falling crude oil prices have taken their toll on Oklahoma, and our state government is now facing a budget
shortfall that could surpass a half-billion dollars.
It is a financial position lawmakers do not want to be in. It is a position that could be avoided, in part, if our state government followed the lead of our state’s oil and natural gas producers.
Much like farmers and ranchers who sell their cattle and wheat at market prices, crude oil and natural gas producers have no say in what price their product brings. They simply take the price the market gives them. The ebbs and flows of commodity prices are a part of doing business in the oil and natural gas industry, but many Oklahoma oil and gas producers have learned how to protect themselves from the volatile ups and downs of a fickle market.
By hedging their production, oil and natural gas producers ensure the price their product will bring when it reaches the market.
Companies hedge their oil and natural gas prices not to benefit from a change in price, but rather to lock in a price for several months, enabling them to plan and budget the year ahead.
As our state’s largest owner of mineral rights, our state government should hedge its resources in a similar manner. A substantial amount of our state’s revenue comes directly from oil and natural gas production and exploration, in the form of the state’s gross production tax and royalty payments. Because of that, the fiscal strength of our state depends substantially on the price of oil and natural gas.
Such risk is difficult to bear, especially in the low-price environment we currently live in, where crude oil prices have been cut by more than half since their 2014 peak. A futures strategy that
locks in revenue our state will receive from oil and natural gas production provides budget certainty even in times of market upheaval.
While hedging will not protect our state entirely from volatile market swings, it could provide the certainty needed to ensure that critical government programs are funded at adequate levels.
Jeff McDougall is president of
Oklahoma City’s JMA Energy Co. and
vice chairman west of the Oklahoma
Independent Petroleum Association.