As the price of crude oil has dropped sharply to a 12-year low, dipping below $30 a barrel as of Friday, January 15, the City of Long Beach may be forced to reconfigure budget projections, according to the city’s finance director.
In calculating the current Fiscal Year (FY) 2016 budget last year, city staff accounted for the decline in the price of oil, which fell 50 percent (from $100 a barrel to about $50 a barrel) in just a six-month period in 2014.
Using a “conservative” baseline of $55 a barrel, city staff projected oil revenue of $11.5 million to the General Fund (allocated through the Uplands Fund) and $10.8 million to the Tidelands Fund, for a total of $22.3 million in oil revenue for FY 2016.
Overall, city staff estimated $50 million less in oil revenue from FY 2014 to the current fiscal year, according to budget documents.
While projecting a slight surplus of $600,000 for the overall General Fund for the current fiscal year, city staff also anticipated a $7.5 million deficit in FY 2017 and a $7.8 million deficit in FY 2018.
City staff noted that upcoming deficits are also a result of rising employee pension costs. The budget stated that the city’s estimated cost of unfunded liabilities was $1.2 billion, with $834 million for CalPERS (California Public Employees’ Retirement System).
Still, city staff also had projected oil revenue to rise over the next two fiscal years, with the city’s base oil price increasing $5 a barrel each year, budgeting $60 a barrel for FY 2017 and $65 a barrel for FY 2018.
If the price of oil continues to crash, however, the city may be forced to recalculate budget projections, said John Gross, Long Beach’s director of financial management, in an interview with the Business Journal.
A lower price of oil would mainly impact capital projects and operations in the Tidelands Fund, however, some oil revenues in the uplands area are tied to the General Fund, he said.
The city’s Tidelands Fund, which relies heavily on oil revenue, covers operations, programs, maintenance and development of marinas, beaches, waterways and city facilities, according to budget documents. Tidelands operations also cover marina management, police, fire, lifeguards and other support functions in the tidelands area.
As for potential impacts on the General Fund, Gross said other revenues, such as taxes, could offset a decrease in oil revenue if the economy is improving, but city staff has yet to make the calculation.
“It certainly would not surprise me if we reduced our projections if we continue this trend,” Gross said. “But we don’t yet have that calculation.”
Gross pointed out, however, that oil revenue is unpredictable, as oil prices are extremely volatile.
“Keep in mind oil prices can go up just as fast as they went down,” he said. “At the present, we don’t know what’s going to happen.”
The main factor causing oil prices to plunge, according to industry experts, is a global oversupply of oil, mainly brought on by a recent boom in shale oil production in the United States. This surplus of oil has been compounded by conflicts in the Middle East, mainly between Saudi Arabia and Iran, in addition to instability in China’s economy.
According to a short-term energy outlook report released January 12 by the U.S. Energy Information Administration, Brent crude oil prices – crude from the North Sea whose price is generally considered a worldwide benchmark – are expected to average $40 a barrel in 2016 and $50 a barrel in 2017. However, the current values of futures and options contracts continue to suggest “high uncertainty in the price outlook,” the report states.
Some economists and industry representatives, meanwhile, have declared that the low oil-price climate may last longer than predicted, with projections that it may fall to $20 a barrel, and some financial analysts have stated that it could be years before the price of oil stabilizes.
Reid Porter, spokesperson for the American Petroleum Institute (API), told the Business Journal that he couldn’t speculate on the direction of the price of oil. However, he did say that consumers are benefiting from the boom in domestic oil production that has brought down gas prices.
“Consumers are benefiting from the fact that United States is now the No. 1 energy producer in the world, and we’re sending the right signals to markets with things like approving U.S. exports. And that’s changing the game.”