Mideast mess could make Minnesota’s budget gains go poof

A $10 a barrel difference in oil would spike up gas prices about 25 cents a gallon.
REUTERS/Larry Downing
A $10 a barrel difference in oil would spike up gas prices about 25 cents a gallon.

The billion-dollar-plus break Minnesota got in its budget deficit this week could evaporate in a hurry if political unrest in the Middle East disrupts the flow of oil from that region.

The new budget forecast released Monday assumes that the price of oil will stay below $100 a barrel and overall inflation will be low for the next two years. If the forecast is right in that and other assumptions, the state faces a $5 billion shortfall for the next two years rather than the $6.2 billion that had been expected earlier.

The assumption that oil prices will stay in the $90 to $95 a barrel range “might be a little optimistic,” state economist Tom Stinson said at a news conference explaining the forecast.

Indeed.

With Libya’s oil production uncertain at best and the spirit of revolt spreading through the oil-rich region, the global energy market “seems like a pocket full of firecrackers just waiting for a match,” The New York Times said.

Abundant uncertainty
No one is saying at this point that the match is lit. We are not in a full-blown oil crisis and there are several reasons to trust we won’t be anytime soon.

But commodities markets hate uncertainty — the one commodity that is abundant in the Middle East right now. And prolonged anxiety could push oil prices just high enough to yank Minnesota’s economy back from the recovery that brightened the state’s fiscal outlook.

Tom Stinson
MinnPost photo by Craig Lassig
Tom Stinson

Even a $10 a barrel difference in oil would spike up gasoline prices about 25 cents a gallon, Stinson said.

For every gallon we buy at that higher price, we have 25 cents less to spend on all of the other items that collectively boost the state’s economy and in turn boost state revenues. That leaves businesses with less money to pay in wages and families with less to spend on everything from new computers to tickets at the ballpark.

It means that the 2 percent federal payroll tax break we got in the December compromise between President Obama and Congress could be eaten up at the gas pump rather than spent to stimulate the economy more broadly.

Of course, Minnesotans could cut back on driving. Significant gas savings often involve action that takes time, though — say, moving closer to work or to a bus line or saving the money to buy a more fuel-efficient car.

But the state needs to hold steady on its fragile recovery right now if it is to hold the gains it has made against the budget deficit.

Looking to Canada
While Minnesota is a cold state with high winter heating bills, it is not necessarily more or less energy dependent than other states, Stinson said. It ranks 18th in the nation for per-capita energy consumption, according to the U.S. Energy Department.

The crude oil that feeds Minnesota’s two refineries comes primarily from Canada via pipeline.

And two in three Minnesota households use natural gas, not oil, to heat their homes. That fuel also comes through pipelines from Canada and the Dakotas.

Still, what happens in the Middle East affects prices worldwide. With so much riding on the developments there, it seemed important to collect the latest news of that oil situation.

Delicate balance
“For the moment, heavyweights like Saudi Arabia can make up the difference, and big consumers, like the United States, have stored millions of barrels of oil for just this kind of emergency,” The New York Times said in its analysis.

Still, supply and demand are “in delicate balance,” it said, and there is little room for more disruptions in supplies.

Spare capacity is now about five million barrels a day.

“That is about 6 percent of the oil that the world consumes every day,” the Times said. “That cushion is greater than in 2008, when it equaled about 2 percent of daily consumption, but it remains worryingly thin.”

To compound the worry, Libya’s oil production — normally about 1.65 million barrels a day — has plunged roughly in half as leader Moammar Gadhafi violently cracked down on democracy-demanding protesters.

By several reports the country’s anti-government forces have secured major oil facilities and guarded them against sabotage. But foreigners who worked Libya’s oil fields have fled the country, and ports are all but shut down.

Even before protests erupted in the Middle East, oil prices had been rising around the world. With economies recovering, demand was expected to rise.

Add the jitters about Middle Eastern supplies and the factors were in place for a price spike. Crude oil traded in New York jumped almost 14 percent last week.

And typical gas prices in Minnesota rose to $3.43 for a gallon of regular, according to the Energy Department. That was up 26 cents a gallon from a week earlier and 73 cents a gallon from a year earlier.

Nationwide, every 1-cent increase costs consumers more than $1 billion a year, Stinson said.

No panic
But the oil market isn’t in a panic. Crude oil traded in New York settled back to about $97 a barrel yesterday, down from nearly $98 last week. (Remember, Minnesota’s budget forecast counts on oil prices under $100 a barrel.)

“Analysts said the impact of Libya’s decreased production should have little medium- or long-term effects on the oil market as OPEC members are already producing over their quotas, oil markets are well supplied and Saudi Arabia is willing to use its additional capacity,” the Wall Street Journal reported.

Saudi Arabian officials said over the weekend that they would increase production by 500,000-600,000 barrels a day to help fill the gap left by disruptions in Libya.

Beyond Libya, the bigger question is what will happen in other Middle Eastern oil pumping nations.

If Iraq could stabilize, it could more than make up any loss from Libya, said another Wall Street Journal report.

Right now, Iraq produces about 2.7 million barrels a day, or just 3 percent of global supply.

“Its growth potential is enormous,” the Journal said. “The International Energy Agency puts Iraq second only to Saudi Arabia in terms of increased oil output by 2035, with Iraq producing another 4.3 million barrels a day by then.”

But can Iraq stabilize? The potential value of its oil output is the very reason insurgents target its oil facilities.

For that matter, how stable is Saudi Arabia?

Room for hope
Such are the questions no one can answer with complete certainty.

As long as uncertainty reigns though, it also includes the chance that oil output will settle back to normal within a few months.

“Should the concern about the Middle East go away, we could see a drop in oil prices,” Stinson said.

In that case, Minnesota’s economy could grow even faster than projected and the state’s budget hole could shrink further.

Comments (3)

  1. Submitted by Greg Kapphahn on 03/01/2011 - 10:48 am.

    If Ronald Reagan, the President who’s remembered for a huge tax cut, but who was enough of a realist to also correct that mistake by signing off on two of the largest tax increases ever passed in America, when that initial tax cut failed to “unleash American business creativity” and produce the fabled increase in federal tax revenue that was predicted (and in which so many of our Tea Party friends continue to so earnestly believe despite the abject failure of that one attempt to enact it)…

    If president Reagan had followed the alternative energy policies initiated by former President Jimmy Carter, we wouldn’t be worrying, now, about whether our oil supplies from the Mideast might dry up.

    Of course a lot of very wealthy oil company folks who have been allowed to privately (and very excessively) tax the general public in order to support obscene levels of profit and personal compensation for their companies and themselves over the past few decades would be a lot less wealthy… the Koch brothers, for instance…

  2. Submitted by craig furguson on 03/01/2011 - 02:07 pm.

    I’m still not spending. I put the SS 2% tax cut in deferred comp and am paying more for gas and bananas (plus other food). Not sure how much is ending up in MN.

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