An oil pump jack in Kansas. Scott Canon / Kansas News Service
By BRIAN GRIMMETTKansas News Service
WICHITA, Kansas — The coronavirus shutdown killed oil prices. That could be a killer for local governments in large swaths of Kansas, places long addicted to the tax money that’s been lost as companies stop pumping crude from the ground.
In some parts of Kansas, counties depend on revenue tied to oil production to cover as much as a fourth of the local property taxes.
With no rebound in prices in a world suddenly awash in a glut of oil, those counties find themselves scrambling to raise taxes elsewhere, slash their budgets, or both.
Ellis County in western Kansas produces more oil than anywhere else in the state. The industry is a key component of its economy, providing income for producers and landowners, while also propping up a wide range of businesses meant to support the industry and those who work in it.
“We have banks out here that will struggle. We have retailers, like myself, that will struggle,” said Dustin Roths, Ellis County Commissioner and owner of a local jewelry store. “Our best customers sometimes are in these industries.”
It’s also a significant source of revenue for the county government. Before the coronavirus and collapse of oil prices, the county expected to get about $1 million in tax revenue from the value of oil in the ground.
With prices this past week hovering around $5 a barrel or less, Roths expects those tax dollars driven by oil prices to fall by half.
The revenue from oil is about 5% of the county’s annual budget. While Roths said the county is doing everything it can to make sure it doesn’t have to lay people off, the shortfall will at least mean a reduction in some services.
“We just kind of have to hold the line,” he said. “We’re not going to be able to make the investments in road infrastructure that we would have liked to.”
The Kansas Geological Survey says eight counties (Barton, Ellis, Finney, Haskell, Ness, Rooks, Russell and Stafford) produced more than 1.5 million barrels of oil in 2018. It’s those counties likely to be hit hardest.
The significant drop in oil prices is largely due to a severe drop in demand for oil because of the coronavirus, and too much production coming from Saudi Arabia and Russia. Remember Economics 101? When you’ve got too much supply and very little demand, the price of what you’re selling is going to bottom out.
“When it costs us more to produce the oil or get it out of the ground than it’s being offered to buy it for, we have no choice but to … basically close up shop,” said Will Darrah, a Wichita-based oil and gas producer.
With wells turned off, there’s nothing to sell. And if there’s nothing to sell, then that means no royalty payments. The Kansas Independent Oil and Gas Association expects those payments to drop by $400 million.
“Royalty payments (don’t go) just to oil and gas people,” said Ed Cross, KIOGA president. “That’s to landowners, and colleges, and other folks that have royalty interests."
He said the prospect of any kind of rebound in prices by the end of the year is also starting to look grim. It would take a huge surge in demand to even bring prices back up to $30 a barrel. Since the last price collapse in 2014, oil in Kansas has hovered around $50 a barrel. And that’s not likely to happen as states only gradually reopen the economy.
“You’re talking at least a couple of years before we get to where we were in January of this year,” Cross said.
Even when prices begin to rebound to a point when pumping oil will be worth it again, turning a well back on isn’t as easy as just flipping a switch.
“You just don’t go back out there 30, 60 days later and turn that well on to get production back to the level it was previously,” said Mike Reed, CEO of Sunrise Oilfield Supply.
Wells and the equipment that run them will need to be checked for safety, serviced and in some cases replaced. And that can only happen if there’s still companies and technicians left in the industry.
While low oil prices are bad for the industry and the local economies that rely on it, Kansas consumers can take advantage of low gas prices (if they have anywhere to go). AAA calculates the average price at the pump in Kansas right now is $1.48 a gallon compared to $2.68 a gallon a year ago.
“It almost hurts us to pump gas that cheap,” Roths said. “Because we know how many people around here it hurts.”
Brian Grimmett reports on the environment, energy and natural resources for KMUW in Wichita and the Kansas News Service. You can follow him on Twitter @briangrimmett or email him at [email protected]. The Kansas News Service is a collaboration of KCUR, Kansas Public Radio, KMUW and High Plains Public Radio focused on health, the social determinants of health and their connection to public policy.