The discovery of massive and historic reserves of oil and natural gas in the Permian Basin of Texas and SE New Mexico could recast the narrative of the state's financial future and its standing at the bottom of most national rankings for education and social achievement.

The discovery is truly epic and in the decades ahead will generate tens of billions of dollars for the state, money totals beyond the imaginations of even the most optimistic:

The federal government has discovered a massive new reserve of oil and natural gas in Texas and New Mexico that it says has the “largest continuous oil and gas resource potential ever assessed.”  Two underground layers in the Delaware known as the Wolfcamp Shale and Bone Spring Formation contain 46.3 billion barrels of unrecovered oil and 281 trillion cubic feet of natural gas, the DOI announced. That’s the largest oil and gas reserve the U.S. Geological Survey has ever discovered.

The discovery could very well upend the conversation over the state's Land Grant Permanent Fund (aka Permanent School Fund) that receives funds from oil and gas leases and royalties. The fund, currently at $18 billion, now appears destined to grow even more enormous and unimpeded for years and years.

A thorny question for austerity hawks is how do they continue to warn that the future of the fund is uncertain because oil and gas exploration is uncertain and, therefore, the fund should not be tapped for current urgent needs such as very early childhood education?

The continued growth of the fund is now as certain as the geologic formations in the Permian Basin containing those billions of barrels of oil. Only occasional down markets in the years ahead will interrupt what will truly be game changing surpluses. Also, any downturns could be less punishing because even in weak markets production will be declining from record-setting levels.

Ryan Flynn, executive director of the NM Oil and Gas Association and not known as a flaming liberal, reminds us that the Permian is already booming and is the major factor in the budget surplus for the fiscal year starting next July 1 that will be $1.1 billion, according to the latest budget forecast released Monday. And he thinks that is only the beginning:

That surplus has the potential to become the norm, not the exception, as we move forward.

There in a nutshell is the argument that will dominate the legislative session that begins in January. Is it time to treat most of the surplus as "the new normal," meaning the state can use it to fund "recurring" budget items such as teacher pay hikes, rebuilding CYFD, and most important the overall public school budget?

Surely, the discovery of this oil treasure lends credence to the spenders and not the savers. That's especially so with the state ranking so far down the ladder nationally and a district court ruling hanging over its head that says it's violating the Constitution by not providing equal education opportunities for public school students.

LIBS LIKING IT

Ryan Flynn

Ironically, it will now be the liberals citing conservatives in oil and gas who are forecasting something akin to a permanent bull market. They will use that to advance their case for a constitutional amendment to tap the Permanent Fund for early childhood education and to pump up spending in other programs. Back to Flynn:

. . . The new USGS estimates mean New Mexico will benefit from continued production for many years to come, Flynn said. . . "Even for someone who understands the resources and potential of the Permian Basin, I can’t help but be surprised by the sheer enormity of what the USGS has reported. The Permian resources shared by New Mexico and Texas make this area one of the most important places in the world in terms of oil production. Those are very important pieces of the basin, but it’s not the whole thing. That’s what makes this report so surprising, even for us."

That declaration will likely be too much for the austerity hawks to overcome. There are already signs, according to House Speaker Egolf, that they will come to the table when it comes to appropriating money for public education to get into compliance with the court order.

COMING UP SHORT

Spoiling the party some was the December oil and gas lease sales by the Feds. Senate Finance Committee Chairman John Arthur Smith had speculated those could contribute another $150 million to the state budget surplus. But the sale went off at only $39 million. Still, the state gets about half that cash.

HISTORY REPEATS

In 1928 the first major New Mexico oil discovery was announced near Hobbs in Lea County. It was an history changing event. 90 years later an announcement of equal if not even more far reaching ramifications includes not just Lea but also Eddy county, both of which are now part of the largest oil and gas reserve in US history.

LUNDSTROM’S OUTLOOK

Before the stunning news about the Permian discovery, Dem Rep. Patricia Lundstrom, chair of the Legislative Finance Committee as well as the House Appropriations Committee, wrote in the LFC newsletter that the budget surplus for the current budget year that ends July 1 is forecast at a very hefty $900 million for a general fund budget of $6.3 billion. That means reserves will be more than restored and that the state's bond rating will be solid. Eighty percent of the surplus money coming into the state is directly from the oil fields, says the state.

Lundstrom sees the upcoming political clash the way we do. She says:

There will be a scramble for the surplus but the real (fight) will be for the new money, the amount of ongoing revenue over the prior year appropriations that can be used for expanding state services. That money will bring out virtually every advocacy group in the state – from those who fight for children’s services to those who fight for business tax breaks.

The state has been so famished in recent years that $1.1 billion (or more) will be sucked up faster than you might think. Lundstrom opines:

Budget drafters will be faced with court-ordered education reforms. . . growth in Medicaid, multiyear waiting lists for certain services for the disabled, way below-market wages for state employees, proposed expansions of successful early childhood services to all families who qualify. . . and pent-up demand in state agencies that have been hanging on for years, trying to provide services with reduced staffs and limited funds. That group includes the program that protects children from abuse, where caseload growth has continued to outrun staff increases.

The good news is that if Flynn and others have it right, we are only in year one of many, many years of budget surpluses. The party pooper, as always, would be a crash in oil prices. However, there's even some good news there. Because of advanced technology companies are now able to turn a profit even if oil drops to the low 40's per barrel. So the crashes in price and volume will have to be deeper than the past to dramatically disrupt the state's cash flow.

ENVIRONMENT CONCERNS

It goes without saying that the incoming administration is going to have crack the whip when it comes to patrolling the environment around the Permian. Problems are already being red flagged by outgoing Land Commissioner Aubrey Dunn, but with a boatload of enviros clamoring to get on MLG's bandwagon, she's not going to lack for policy advice on keeping the boom within its proper boundaries.

And the folks in Lea and Eddy counties need the new Guv (who did not carry their counties) and their legislators to bang the drum hard for immediate road improvements in Lea to overcome traffic hassles. And the state and the oil boys need to work together to keep adding pipeline capacity to ship the oil out. It's not going to finance a New Mexico education turnaround if it stays in the ground.

PEARCE TAKES PARTY

It's probably difficult for foes of Rep. Steve Pearce to envy him over his overwhelming win of the chairmanship of the NM Republican Party at Saturday's GOP Central Committee meeting in ABQ.

Pearce faces a Herculean task in turning the party around, after its crushing defeats in the midterm that included Pearce's loss of the governor's race to MLG and a loss of GOP House seats that took the Dem majority in the state House to 46 to 24.

If Pearce and the R's can't put it into high gear, 2020 could be just as bad. It's assumed Trump will be the GOP nominee for President and that he will lose New Mexico. The question is by how much.

And can Pearce find a viable opponent for Senator Tom Udall, who is signaling a re-election run? That could help bring out Republicans and help them recapture some of the state House seats that were lost in November.

And then there's the state Senate where Republicans once thought safe could be threatened by yet another blue wave as the state continues to drift to the Dems.

And then there's Pearce insistence on keeping open the possibility of trying to reclaim his southern congressional seat which he gave up to run for Governor and that is now occupied by Dem Xochitl Torres Small.

It's "way too early" he said when questioned about whether he will make another run. Insiders say his wife Cynthia is not keen on a return to DC, but Pearce isn't shutting the door. If he runs, he will have to begin raising money soon. That would in effect bring his chairmanship to an end as he pursued his personal ambition, not that of the party.

We'll know soon enough if Pearce's pursuit of the chairmanship is the real deal or simply a cover to feed a DC addiction.

Pearce beat businessman John Rockwell 276 to 101, a 73 percent victory. But looking at what he faces the win might fall into the category of "be careful what you wish for."

This is the home of New Mexico politics.

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(c)NM POLITICS WITH JOE MONAHAN 2018