A publication of the Office of the State Treasurer • Treasurer Ken Miller, Ph.D.

Economic Report TM

Oklahoma

News and analysis of Oklahoma’s economy

State Capitol Building, Room 217 • Oklahoma City, OK 73105 • (405) 521-3191 • www.treasurer.ok.gov

Volume 6, Issue 11 • November 30, 2016

SEE ENERGY PAGE 3

Oklahoma and the energy industry are inextricably linked. When oil and gas prices rise, so do employment levels and state revenue. When prices drop, as they did most recently starting in 2014, the whole state feels the pain with rising joblessness and plummeting tax collections.

What some may not realize is the extent to which the industry, the state economy, and state government are bound together.

A September 2016 report, commissioned by the State Chamber of Oklahoma’s Research Foundation and conducted

by RegionTrack, Inc. of Oklahoma City, found the industry accounts for 17 percent of state gross domestic product, 13 percent of state household earnings, and 6.5 percent of total employment, while paying 22 percent of total state taxes.

Direct state revenue effect

The industry directly pays gross production, corporate income, sales

and motor vehicle taxes to the state. However, specific measurement of the

industry’s direct contributions to state coffers can most easily be seen in gross production collections since payments come exclusively from oil and gas companies. State law prohibits publicly releasing what individual companies pay, so

segregating energy company payments

As goes the oil patch . . .

Inside

• Guest commentary by Corporation Commissioner Dana Murphy

• Incentive Evaluation Commission issues recommendations

• Year-to-date General Revenue trails estimate

• Oil and gas tax collections rise in October Gross Receipts

• State unemployment drops

Editor

Tim Allen, Deputy Treasurer for Communications and Program Administration

“When oil and gas prices rise, so do employment levels and state revenue. When prices drop, the whole state feels the pain.”

Source: Office of the State Treasurer

Gross Production Collections as Percentage of Gross Receipts to the Treasury

0%

2.5%

5.0%

7.5%

10.0%

FY-10 FY-11 FY-12 FY-13 FY-14 FY-15 FY-16

Guest CommentaryBy Dana Murphy, Corporation Commissioner

Oklahoma Economic Report TM November 30, 2016

www.treasurer.ok.gov • Page 2

On December 3, 1934, Oklahoma Governor-elect E.W. Marland

met with the governors of Texas and Kansas. On the agenda: A bold new plan being pushed by Oklahoma to bring states together in a cooperative arrangement to foster the sound development of oil and natural gas resources. From these talks came the Interstate Oil and Gas Compact Commission.

Back then, the issue was what was called “waste.” In part, this was the result of a gold-rush mentality and uncontrolled development, which was itself brought about by advances in drilling technology. “Waste” included large amounts of oil spilled on the ground, rather than making it to market.

Nowadays we would categorize such a problem as both environmental and financial. Oklahoma was among the first of the large producing states to adopt “anti-waste” law, laying the groundwork for modern environmental regulation that seeks to ensure that Oklahoma’s oil and gas resources are developed in a safe, economically beneficial manner.

The idea of bringing states together to work on the problem to their mutual benefit was very much “outside the box” thinking, and represented a

fresh, creative approach to a new problem.

Fast-forward more than 80 years and one finds that “the more things change, the more they stay the same.” The sweep of technological change in the oil and gas industry, particularly over the past decade, cannot be overstated.

Horizontal drilling using the technologies undreamed of only a relatively short time ago has unlocked oil and natural gas resources to an extent that America has gone from an oil and gas “has-been” to being a real threat to OPEC’S and Russia’s market dominance – so much so that a price war was launched that in part targeted U.S. producers.

But with all that change has come new problems. Just as our counterparts of 1934, we face a changed world and the need for fresh new approaches to solving the challenges presented by that change.

Horizontal drilling has not only unlocked huge amounts of oil and natural gas; it also unlocked vast amounts of water from the formations that must be disposed of without raising the risk for induced earthquakes while still protecting our precious fresh water.

The rules and laws that served to protect the rights of mineral owners and producers were written when prominent development was through vertical wells. Applying a vertical regulatory scheme to one now dominated by horizontal wells is the proverbial square peg in a round hole.

The difficulties and complexities created by this “horizontal world”

“America has gone from an oil and gas ‘has-been’ to being a real threat to OPEC’s and Russia’s market dominance – so much so that a price war was launched that in part targeted U.S. producers.”

The more things change . . .

SEE MURPHY PAGE 3

www.treasurer.ok.gov • Page 3

Oklahoma Economic Report TM November 30, 2016

Opinions and positions cited in the Oklahoma Economic ReportTM are not necessarily those of Oklahoma State Treasurer Ken Miller or his staff, with the exception of the Treasurer’s Commentary, which of course, is the viewpoint of the treasurer.

into the other revenue streams is not possible.

As shown in the graph on page 1, in

FROM PAGE 1

Energy

SEE ENERGY PAGE 4

the past seven fiscal years – FY-10 through FY-16 – gross production taxes accounted for between 9.6 percent and 3.3 percent of total Gross Receipts to the Treasury. Collections ranged from

just more than $978 million in FY-11, when the average price of benchmark West Texas Intermediate Crude Oil sold for $85.22 per barrel, to a low of $367 million in FY-16, when benchmark crude sold for $43.71 per barrel.

During those years, monthly natural gas prices have ranged from $6 per million Btu in February 2014 to $1.73 in March 2016.

Drilling activity has also varied greatly for both oil and natural gas. Monthly rig counts for oil have ranged from 199 in October 2014 to 14 in June 2010. For natural gas, rig counts from ranged from 140 in September and October of 2011 to 1 in May 2015.

The graph on this page shows the direct link between benchmark crude prices and oil gross production collections. A comparison of natural gas prices to gas gross production collections shows the same linkage.

MurphyFROM PAGE 2

seem overwhelming at times. However, in order to tackle a problem, one has to admit to its existence.

Those who gathered in 1934 faced no less daunting a set of circumstances. They and others joined together to meet the challenges. Oklahoma’s

oil and gas history has been a long series of chapters of challenges and changes.

I see that same effort every day in countless ways, and it is largely a cooperative one. Industry, government, and researchers are working to meet today’s challenges with an eye toward the future’s challenges.

The journey may be different, but the goal is the same: Meeting the energy needs of the nation in an economically and environmentally safe manner.

I am honored to have the opportunity to be part of today’s and tomorrow’s solutions for Oklahoma and the nation.

Sources: U.S. Energy Information Administration and Oklahoma Tax Commission

Crude Oil – Price vs. Gross Production Collections

$0

$27.50

$55.00

$82.50

$110.00

Jan

-11

Feb

-11

Ma

r-11

Ap

r-11

Ma

y-11

Jun

-11

Jul-1

1A

ug

-11

Sep

-11

Oc

t-11

No

v-11

De

c-1

1Ja

n-1

2Fe

b-1

2M

ar-

12A

pr-

12M

ay-

12Ju

n-1

2Ju

l-12

Au

g-1

2Se

p-1

2O

ct-

12N

ov-

12D

ec

-12

Jan

-13

Feb

-13

Ma

r-13

Ap

r-13

Ma

y-13

Jun

-13

Jul-1

3A

ug

-13

Sep

-13

Oc

t-13

No

v-13

De

c-1

3Ja

n-1

4Fe

b-1

4M

ar-

14A

pr-

14M

ay-

14Ju

n-1

4Ju

l-14

Au

g-1

4Se

p-1

4O

ct-

14N

ov-

14D

ec

-14

Jan

-15

Feb

-15

Ma

r-15

Ap

r-15

Ma

y-15

Jun

-15

Jul-1

5A

ug

-15

Sep

-15

Oc

t-15

No

v-15

De

c-1

5Ja

n-1

6Fe

b-1

6M

ar-

16A

pr-

16M

ay-

16Ju

n-1

6Ju

l-16 $0

$15

$30

$45

$60

Pric

e p

er b

arr

el

Gro

ss Prod

uc

tion

co

llec

tion

s in $ m

illion

s

West Texas Intermediate Crude Oil PricesCrude Oil Gross Production Tax Collections

www.treasurer.ok.gov • Page 4

Oklahoma Economic Report TM November 30, 2016

FROM PAGE 3

Energy

A cursory analysis of gross production collections has yet to show the effect of changes approved in tax rates in 2015.

All new production is now taxed at a rate of 2 percent for the first 36 months and then at a 7 percent rate. Previously, certain types of well, such as those horizontally drilled, were initially taxed at a 1 percent rate.

Demonstrating the linkage

The claim that oil and gas activity and prices have a profound effect on the state economy is perhaps best demonstrated by the graph at the bottom of this page.

It compares Gross Receipts to the Treasury to employment levels in the Mining and Logging supersector, which in Oklahoma equates to oil and gas jobs.

As the number of those employed in the oil fields rises and falls, so, too, do

gross state tax receipts within a two to four month lag. For example, during the Great Recession employment levels turned downward in November 2008 and state gross receipts followed suit in January 2009, two months later. The recovery in gross receipts began four months after employment levels began to rebound.

The latest downturn in revenue began three months after oil and gas employment levels began to fall.

Total economic effect

The indirect impact of an industry as large as oil and gas reaches deep into nearly every sector of the state’s economy.

The State Chamber report states that in addition to $37.1 billion in average annual output of goods and services, the energy industry supports an estimated $28.6 billion in spillover. The industry, according to the report, is responsible

for $65.7 million in total state output.

When spillover is included, the report says 27 percent, or $32.6 billion, of total state household income is supported by the energy sector.

In the labor market, almost 1 in 5 wage and salary workers and the self-employed are employed either directly or indirectly by the energy industry in Oklahoma, according to the report.

Even though employment levels have decreased during the recent state recession, the economic study shows that on a five-year average the industry has employed 133,800 self-employed proprietors and wage and salary workers. That has generated total annual income of $15.35 billion, according to the study.

The report estimates average annual purchases of $11.3 billion from state-based suppliers by the industry. Plus, an estimated $1.7 billion in oil and gas royalties were paid to Oklahomans in 2015.

As measured by the energy sector’s share of state household income, the Chamber report says Oklahoma remains as sensitive to the energy sector as in 1982.

Learn more

Read the State Chamber’s Research Foundation report: Economic Impact of the Oil & Gas Industry on Oklahoma.

Read the State Treasurer’s Gross Receipts to the Treasury reports.

Shaded area denotes U.S. recession Sources: Bureau of Labor Statistics & State Treasurer

Gross Receipts to the Treasury/Oil & Gas EmploymentJanuary 2008 – October 2016

35.0

42.5

50.0

57.5

65.0

08 09 10 11 12 13 14 15 16 17$9.25

$10.00

$10.75

$11.50

$12.25

Oil

& G

as

Emp

loym

en

t

12-Mo

nth

Gro

ss Re

ce

ipts 12-Month Gross Receipts (in $ billions)

Oil & Gas Employment (in thousands)

www.treasurer.ok.gov • Page 5

Oklahoma Economic Report TM November 30, 2016

Year-to-date General Revenue trails estimate by 1.8 percent

Source: Office of Management and Enterprise Services

Monthly General Revenue Fund Allocations vs. Estimate(percentage difference)

-20%

0%

20%

40%

Jul-1

2

Oc

t-12

Jan

-13

Ap

r-13

Jul-1

3

Oc

t-13

Jan

-14

Ap

r-14

Jul-1

4

Oc

t-14

Jan

-15

Ap

r-15

Jul-1

5

Oc

t-15

Jan

-16

Ap

r-16

Jul-1

6

Oc

t-16FY-13-0.5%

FY-14-4.8%

FY-15-2.2%

FY-16-9.4%

FY-17 YTD-1.8%

After one-third of FY-17, allocations to the General Revenue Fund (GRF) trail the estimate by $30.5 million, or 1.8 percent, according to the Office of Management and Enterprise Services (OMES).

At the end of October, two of the GRF’s four major revenue streams exceed the estimate.

Net income tax and gross production tax

top the estimate by a combined $19.8 million. Sales tax and motor vehicle tax allocations are less than the estimate by a combined total of $46.6 million.

In the first four months of the current fiscal year, GRF collections have been less than the estimate three times.

In the 52 months since July 2012, the beginning of FY-13, GRF allocations have been less than the estimate 35

times, or in just more than two-thirds of the months.

In each of the past four fiscal years, total GRF collections have been below the official estimate. Except for FY-16 when revenue failure was declared and across-the-board cuts were ordered for appropriated state agencies, total fiscal year allocations have been within the 5 percent cushion established in the state constitution.

Incentive Evaluation Commission issues recommendationsThe Incentive Evaluation Commission (IEC), established by the Legislature in 2015 to make recommendations on changes to Oklahoma’s tax incentives, has issued its first annual report.

The first incentive on the chopping block is the zero-emission tax credit

for the wind power industry. Current law allows companies that come online before the beginning of 2021 to claim the credit, which IEC consultants say could cost the state $100 million each year through 2030.

The IEC agreed with the consultant’s

recommendation that the Legislature reconfigure the credit to either establish a program cap or accelerate closing the window for eligibility. The project team also recommended that facilities claiming a credit be required to provide monthly data relating to use of the credit.

www.treasurer.ok.gov • Page 6

Oklahoma Economic Report TM November 30, 2016

Oil and gas tax collections rise in October Gross Receipts to the Treasury(Original release date: November 8, 2016.)

For the first time in almost two years, October tax collections from the production of oil and natural gas topped collections from the same month of the prior year, State Treasurer Ken Miller announced today as he released the monthly Gross Receipts to the Treasury report.

While still significantly lower than collections prior to the ongoing oil price slump, October gross production collections of $35.1 million were above

October 2015 collections by $2.9 million, or 8.9 percent. The last time monthly gross production collections topped those of the prior year was in

December 2014, when receipts totaled $72.1 million.

“It’s not yet time to sing ‘Happy Days Are Here Again,’ but this month’s gross production number is welcome news,” Miller said. “Since April, we’ve seen monthly gross production

collections generally rise along with crude oil prices. Passing the prior year threshold this month is encouraging.”

SEE REVENUE PAGE 7

“It’s not yet time to sing ‘Happy Days Are Here Again,’ but this month’s gross production number is welcome news.”

Source: Office of the State Treasurer

Monthly Gross Receipts vs. Prior Year

Dollar change (in millions) from prior year

-$125

-$100

-$75

-$50

-$25

$0

$25

$50

Nov-15Dec-15

Jan-16Feb-16

Mar-16Apr-16

May-16Jun-16

Jul-16Aug-16

Sep-16Oct-1

6

Income TaxSales Tax

Gross ProductionMotor Vehicle Other

October Gross Receipts to the Treasury totalled $886.2 million, while the General Revenue Fund (GRF), as reported by the Office of Management and Enterprise Services, received $390.9 million, or 44.1%, of the total.

The GRF received between 29.7% and 52.8% of monthly gross receipts during the past 12 months.

From October gross receipts, the GRF received:

• Individual income tax: 55.4%

• Corporate income tax: None

• Sales tax: 43.4%

• Gross production-Gas: 67.2%

• Gross production-Oil: 8.7%

• Motor vehicle tax: 27.1%

• Other sources: 37.6%

October GRF allocations are below the estimate by $47.3 million, or 10.8%. Year-to-date GRF revenue trail the estimate by $30.5 million or 1.8%.

October insurance premium taxes totaled $105,673, a decrease of $279,671, or 72.6%, from the prior year.

Tribal gaming fees generated $11.2 million during the month, up by $503,942, or 4.7%, from last October.

October Gross Receipts &

General Revenue compared

www.treasurer.ok.gov • Page 7

Oklahoma Economic Report TM November 30, 2016

RevenueFROM PAGE 6

October gross production collections are based on production activity from August when benchmark West Texas Intermediate crude oil sold for $44.72 per barrel.

An apparent trough was reached last April when gross production collections,

based on February prices of $30.32 per barrel, dropped to a 17-year low of $20.8 million.

Oil and gas tax collections notwithstanding, all other major revenue streams – income, sales, and motor vehicle taxes – were lower in October and total monthly Gross Receipts to

the Treasury continued a 20-month contraction. October collections, at $886.2 million, were down by 3.5 percent from October of last year. The last time October collections were lower was in 2011. Collections during the past 12 months, at $10.9 billion, are the lowest since March 2012.

About Gross Receipts to the Treasury

Since March 2011, the Treasurer’s Office has issued the monthly Gross Receipts to the Treasury report, which provides a timely and broad view of the state’s macro economy.

It is provided in conjunction with the General Revenue Fund (GRF) report from the Office of Management and Enterprise Services, which provides information to state agencies for budgetary purposes. The GRF receives about half of the state’s gross receipts with the remainder paid in rebates and refunds, remitted to cities and counties, and placed into earmarks to other funds.

State unemployment notches down slightly in October

Source: Oklahoma Tax Commission

Gross Production Tax CollectionsNovember 2013 – October 2016

$0

$20

$40

$60

$80

$100

Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct

One year priorCurrent 12 months Two years prior

(in m

illio

ns)

Oklahoma’s seasonally-adjusted unemployment rate fell by one-tenth of one percentage points in October, ending eight months of increases, figures released by the Oklahoma Employment Security Commission show.

In addition, September’s state jobless rate was revised to 5.3 percent from a preliminary 5.2 percent. October marks the fourth consecutive month the Oklahoma unemployment rate has been higher than the national rate, which was set at 4.9 percent. Source: OESC

Oklahoma Unemployment ReportOctober 2016

FOR RELEASE: November 18, 2016

OKLAHOMA EMPLOYMENT REPORT – October 2016 Oklahoma unemployment rate down slightly in October Oklahoma’s seasonally adjusted unemployment rate edged down 0.1 percentage point to 5.2 percent in October, while the U.S. unemployment rate was little changed at 4.9 percent in October. The state’s seasonally adjusted unemployment rate was up by 1.0 percentage point compared to October 2015.

In October, statewide seasonally adjusted employment grew by 259 persons (0.0 percent), and unemployment fell at the same time by 349 persons (-0.4 percent). Over the year, seasonally adjusted unemployment grew by 17,889 persons (+23.2 percent).

October 2016Unemp.

rate* Labor force* Employment* Unemployment*

Oklahoma 5.2% 1,815,604 1,720,628 94,976United States 4.9% 159,712,000 151,925,000 7,787,000

* Data adjusted for seasonal factors

OKLAHOMAUnemp.

rate* Labor force* Employment* Unemployment*

Oct '16 5.2% 1,815,604 1,720,628 94,976Sept '16 5.3% 1,815,694 1,720,369 95,325Aug '16 5.1% 1,821,459 1,729,204 92,255July '16 5.0% 1,834,543 1,743,047 91,496

June '16 4.8% 1,850,770 1,761,046 89,724May '16 4.7% 1,864,194 1,776,399 87,795

Oct '15 4.2% 1,845,974 1,768,887 77,087

* Data adjusted for seasonal factors

October 2016 Number Percent Number Percent

Labor force -90 0.0% -30,370 -1.6%Employment 259 0.0% -48,259 -2.7%

Unemployment -349 -0.4% 17,889 23.2%

Monthly change* Annual change*

* Data adjusted for seasonal factors

www.treasurer.ok.gov • Page 8

Oklahoma Economic Report TM

Economic Indicators

November 30, 2016

Gross Receipts vs. Oil & Gas EmploymentJanuary 2008 – October 2016

Shaded area denotes U.S. recession Sources: Bureau of Labor Statistics & State Treasurer

35.0

42.5

50.0

57.5

65.0

08 09 10 11 12 13 14 15 16 17$9.25

$10.00

$10.75

$11.50

$12.25

Oil

& G

as

Emp

loym

en

t

12-Mo

nth

Gro

ss Re

ce

ipts 12-Month Gross Receipts (in $ billions)

Oil & Gas Employment (in thousands)U.S.Oklahoma

1.0

3.0

5.0

7.0

9.0

11.0

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Source: Bureau of Labor Statistics

Unemployment RateJanuary 1980 – October 2016

Shaded areas denote U.S. recessions

U.S.-4.9%OK-5.2%

U.S.Oklahoma

1.0

3.0

5.0

7.0

9.0

11.0

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Leading Economic IndexJanuary 2001 – October 2016

Source: Federal ReserveShaded areas denote U.S. recessions

This graph predicts six-month economic movement by tracking leading indicators, including initial unemployment claims, interest rate spreads, manufacturing and earnings. Numbers above 0 indicate anticipated growth.

-5.0

-2.5

0

2.5

5.0

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

U.S.Oklahoma

Oklahoma Stock IndexTop capitalized companies

January 2009 – November 2016

Shaded area denotes U.S. recession Source: Office of the State Treasurer

$43.70

$10

$30

$50

$70

09 10 11 12 13 14 15 16 17

Avg. = $43.17

Oklahoma Oil Prices & Active RigsJanuary 2011 – November 2016

Sources: Baker Hughes & U.S. Energy Information Administration

Price

pe

r BBLAc

tive

Rig

s

0

50

100

150

200

11 12 13 14 15 16 17$0

$30

$60

$90

$120

Active Rigs

Price

Sources: Baker Hughes & U.S. Energy Information Administration

Oklahoma Natural Gas Prices & Active RigsJanuary 2011 – November 2016

0

50

100

150

200

11 12 13 14 15 16 17$0

$2

$4

$6

$8

Active Rigs

Price

Price

pe

r MM

Btu

Ac

tive

Rig

s