Our blogging of the historic oil reserves discovered in the SE corner of the state and the $1.1 billion state budget surplus already generated by the oil boom there drew an unusually large amount of e-mail.

For a minute we thought we were being spammed by the Sierra Club since so many of the writers damned the oil discovery and the oil surplus because of the climate risk of fossil fuels. So in contrast to what one reader dubbed our "giddiness" over the oil discovery and the state surpluses being generated, we proceed to Reader Vox Populi

Reader Greg Smith writes:

Joe, Take a deep breath. Think about the Permian basin discovery in the context of climate change. Sadly, NM needs the cash now. It would be foolish to cut back our state's oil production today and let other producers make up the difference while global demand stays so high. That would simply shift money without helping the climate. However, the world needs to leave roughly 80% of proven oil and gas reserves in the ground. The time is fast approaching when the world must agree to act accordingly. So let's not count on perpetually pumping Permian. Let's plan on being ready to cooperate with the rest of the world, starting on a time scale measured in years--not decades--and then ramping it down to zero

Reader Alan Schwartz says:

Joe, When I moved here 22 years ago a different group of "experts" told us that the Albuquerque aquifer was the size of Lake Michigan. I guess we just have to hope that this latest group of experts has done a better job.

Reader "Crockagator" writes:

Hey, Joe. If we are on the road to many, many dollars from the oil discovery who needs a top bond rating? We just need to pay for everything with cash plus pre-pay all outstanding bond debt. The Crockagator. 

Actually, Crockagator, the state House Speaker is now suggesting that many upcoming construction projects be paid for with the cash surplus--not bonds.

Reader Bruce Shah writes:

I guess for me the irritation is that not one of the policy players in the oil boom added a climate caution. I agree completely with your comment about our state's critical needs. But we have an $18-billion reserve in the form of the Land Grant Permanent Fund. A tiny portion of that could do the trick--at the same time we slowed the drilling. 

Any bets on Senate Finance Committee Chairman John Arthur Smith hiding behind the Permian estimates and again stonewalling dipping into the reserves? Not sure I am accurate but we are last--or second to last--in every social index and first, second or third in reserves.

Well, Bruce, you didn't have to wait long. The top legislators dealing with finance are all putting up warning flags about spending the surplus on other than one time expenses and most of them also continue to oppose using a small portion of the Permanent Fund for early childhood education. It's not easy getting rid of a poverty mentality, even as the riches pile up in front of them.

ANONYMOUS BUT QUOTABLE

An anonymous reader from ABQ writes:

I am in complete agreement with you and your “no bullshit economists” about the need to invest in people to improve our state’s economy. However. I despair at the lack of discussion about the conflict between the source of the surplus and the need to reduce emissions of greenhouse gases, and the lack of discussion about targeting a significant part of the investment in people toward reducing emissions and our state’s dependence on them. While doing the basic reinvestment so desperately needed in our schools and our support services for children, we also should be looking at things like:

--Tax credits for investment in renewable energy and in improving the energy efficiency of both public and private buildings;

--Replacing transportation vehicles with others that reduce fossil fuel consumption 

--Economic development that does not rely on producing or using fossil fuels;
making our state more resilient in anticipation of continued climate change (reduced snowpack and precipitation, increased risk of drought/heat waves/fires).

Yes, New Mexico is an economically poor state, and we need to take advantage of the economic opportunity that has landed in our lap. And the oil and gas is likely to get extracted and used no matter what our state does alone. But we need to bear in mind that this is all being done on the back of our climate and the long-term health of the natural systems we depend on (and that make New Mexico the place so many of us love).

Good stuff, Mr. Anonymous. Why didn't we write that?

BOOM AND BUSTS

Longtime reader Norm Gagne writes:

The discovery of huge oil and gas reserves in the Permian Basin has many counting and planning the spending of enhanced state revenues far into the future. While we surely could use a financial boost for a cash starved state budget today and tomorrow, the collective huzzahs overlook sobering facts. As surely as dawn follows the dark, oil busts follow oil booms. While increased U.S. production has decreased the impact of unscrupulous and less politically stable suppliers, worldwide supply of oil still depends too much on the likes of Russia, Venezuela and the Middle Eastern countries. 

The increasingly dire reports of climate scientists highlight the urgency of moving away from carbon fuel energy sources. The lessons, it would seem, are to spend the new money wisely, to meet vast unmet needs to be sure, but with a significant chunk devoted to developing a non-carbon based future economy for New Mexico.

Larry Gioannini writes:

I'm dismayed and disappointed by your giddiness over the Permian Basin oil boom. Either of the two most likely outcomes of this are disastrous. If the rest of the world acts quickly and responsibly with regard to Climate Change New Mexico will be among those possessing the largest stranded asset of all time. If we don't act quickly enough to limit the damage from Climate Change, New Mexico will contribute significantly to the ever accelerating and underestimated climate disasters bring misery to billions of people. Really not a time for Champagne and cigars.

Thanks, Larry. But we remain giddy (and unapologetic) about the good that extra money could do in making New Mexico a better place in which to live. We're with you on climate change but the youth of today who are being shortchanged certainly qualify as a stranded asset. As for champagne and cigars, is there ever a bad time for them?

Paul Sandman writes:

Joe, With all the talk about oil and gas, what about the conversation in Poland about getting rid of all fossil fuel use? The protests outside the House Minority Leader's office by fellow Dem’s shows their determination.

SAVE IT ALL

Kevin Garcia writes:

Joe, in regards to the projected budget surplus of $1.1 billion, you sure sound like many of the politician's in the past who have argued for over fifty years to spend the corpus of the Permanent Funds on recurring outlays! Since these revenues are from a Extractive and Depleting revenue source, we would be prudent to spend funds on education and other critical programs, but we should also continue to work to build the corpus of these Permanent Funds for future generations! What would be so wrong in building these funds up to $50 or $100 billion over time before the oil runs out and thus thereby securing a permanent source of investment revenues for future generations of New Mexicans? Given a projected earnings rate of 7% a permanent recurring revenue source of $3.5 to $7 billion for programs could be our legacy for the education of future generations of New Mexicans! 

The state's two large permanent funds now hold $24 billion.

NOT PERSONAL, JOE 

Cheryl Haaker writes:

"Massive and historic reserves of oil and natural gas." The need and the greed preclude New Mexico and Texas from doing the right thing, which is leaving the stuff in the ground. It's actually shocking that these discussions centering around money will totally avoid the global warming/climate change aspects of producing and burning this oil and gas. I would like to see every initiative to drill or frack be paired with an initiative to increase the supplies of renewable energy sources. Charge higher royalties for existing and new production to further equalize and tilt the playing field. Global climate change doesn't stop just because you turn to the financial pages.  Don't take this rant personally. I really appreciate the way you've helped us understand La Politica. It's just that the pervasive blindness towards climate change frequently gets to me.

No offense taken, Cheryl. We are not unaware of the paradox the oil discovery presents--a potentially huge gift for the aspirations of our people today--in this moment--and the potential danger of fossil fuels to future generations. Previous reader suggestions are helpful--that today we embrace our good financial fortunes to help resolve the state's long-standing social conditions crisis but also lay plans to gradually wean ourselves from oil dependency.

RICH AND/OR DEAD

Deryle Perryman writes

Interesting predicament presented in your column, eh? If those reports of the oil bonanza are anywhere near likely, apparently we're being presented the option of becoming "rich" and/or dead.

ART ATTACK

Charles Knoblauch writes of ART, the boondoggle rapid transit project for ABQ's Central Avenue:

Joe, for reasons I can’t quite figure out, there has been no real noise about the switch of the ART vehicles from electric to diesel. One of the great selling points was the non-polluting buses. Now that has been jettisoned with no outcry to have the heads of the city council members, former Mayor Berry, or the planners. We are now stuck with an unnavigable Central, belly up businesses, unnecessary new buses, and a big ass bill.
Maybe the problem is the lack of yellow vests in NM. Just a thought.

For those unsure about the "yellow vest" reference, check your Paris news feed.

Thanks for the mail. Social media sites such as Facebook are full of comment and opinion and while often entertaining. it's not always thoughtful. That's why we look forward to Reader Vox Populi and that's why. . . .

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Darn. It's only $1.1. billion. No matter. The projected state budget surplus could be triple that and still the hawks that control the Legislative Finance Committee would urge that most of it be hidden under the mattress.

And that's what happened Monday as the surplus projection from state economists for the budget year that begins next July 1 came in lower than expected in some quarters but is still a massive $1.1 billion or 17 percent of the current $6.3 billion state budget.

That enormous number was a bit of a letdown because state House Speaker Egolf threw out the possibility of $2 billion and Senate Finance Committee Chairman John Arthur Smith mentioned $1.5 billion. Still, it is the largest projected dollar surplus in the history of the state. No one is sneezing at it and it could still go higher.

The LFC bean counters immediately warned that spending a substantial portion of the money on recurring programs (like public education) would put the state at risk and urged much of it be saved.

They advocate that any new spending be mainly on one time projects like road work etc. Never mind that New Mexico has been at risk for the past decade with stagnant economic and population growth, rampant crime and horrific child abuse and murders stemming from an economic and social decline that has caused untold suffering and kept the state in the gutter in the important national rankings.

The point that the LFC economists continue to miss and that those on our list of "No Bullshit Economists" get--including Dr. Chris Erickson and now retired Dr. Jim Peach of NMSU--is that an investment in people is now critical to reversing the state's poor economic and educational standing. Not taking that investment risk is the real risk New Mexico has taken and it continues to stare at the depressing consequences.

A COMING CLASH

The austerity hawks desire to squirrel away even more cash and shy away from recurring spending will clash somewhat with the views of incoming Governor Lujan Grisham who said during the campaign increased spending on public education and upgrading the beleaguered Children, Youth and Families Department is essential. But it remains to be seen how aggressive she will be and whether the hawks will corner her. And also whether she will be satisfied with base hits that the spin doctors will try to frame as home runs.

IT'S DIFFERENT NOW

Not unexpectedly, the LFC economists downplayed the enormity of the surplus. They characterized it as being "similar" to ones over a decade ago and that ultimately disappeared in an oil bear market, leaving the state with a big budget hole because of increased spending.

However, the series of annual surpluses that were presided over by Governor Richardson--and led him to rebate some of the money directly to taxpayers--were in the hundreds of millions--not over $1 billion--and they were not accompanied by technology that has made oil drilling profitable in the Permian Basin even if prices go into the low 40's. Not to mention that the Permian is now found to hold some of the largest oil reserves on the planet. Things do change.

The risk is that the economists are overplaying the Bear market scenario for New Mexico. And, of course, we could be downplaying it. That's the argument going forward.

FORWARD OR STATIC?

We and others who see the cup half full and a great opportunity to begin the long march in reversing the state's dismal social conditions with aggressive budgeting are not going to bang our heads against the wall. The point has been made over and over again for the past eight years. If New Mexico wants strategic investments in its people it can now do so with that $1.1 billion surplus and a small portion of the $18 billion Land Grant Permanent Fund. It's that simple.

If Lujan Grisham and the Legislature want the incrementalism of the Richardson years--when the state was a much different place and not nearly as plagued with the menacing issues that it is today--that's their call. From this corner that looks like a recipe for continued failure. There's really not much more to be said.

THE BOTTOM LINES

In a first draft Monday we had the projected state surplus for the budget year that goes to next July 1 at $900 billion. Of course, we meant $900 million. And in the new budget projections released Monday it went up to $950 million.

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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."

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