Higher Oil Prices Are Good for Louisiana, Right? Maybe Not
Once upon a time, the powers that control the state of Louisiana thought it would be a wise idea to connect the state's ability to collect revenue to oil and gas production. I am sure at the time the idea was hatched it made perfect sense. The price of oil was solid and that meant a nice income stream for the state's general fund.
Maybe that's why when I first moved to the state back in the middle 90s I was told over and over again that high oil prices are good for Louisiana. It makes sense. The revenue stream comprised of severance taxes and royalties were mind-boggling. Higher oil prices also meant our people were going to work. Those high paying oil patch jobs were the backbone that supported so many indirect jobs across the state.
You've probably noticed that oil prices and prices for fuel especially are at all-time highs on their respective markets and at the pump. That's good, right?
Louisiana's State Treasurer John Schroder has issued a cautionary, "not so fast my friend" kind of statement about that. Secretary Schroder does suggest the state will benefit from higher-than-$100-a-barrel-oil but the state might lose out in other areas of revenue generation because of that.
It's an economic principle called "opportunity cost". Investopedia defines opportunity cost this way.
Opportunity costs represent the potential benefits an individual, investor, or business misses out on when choosing one alternative over another.
And while what Secretary Schroder is concerned about is not exactly as defined by Investopedia the concept is similar.
Secretary Schroder is suggesting that while the higher oil revenues are good for the state we might start to see shortfalls in sales tax revenues because of them. In other words, people might have to choose between putting fuel in their vehicles over purchasing a new appliance, going out to eat, buying new clothes, or taking a weekend getaway.
Let's face it, most of us only have so much money to spend in any given month. And, when more of that money is going for gasoline, less of it is going for other necessities and luxuries too.
Another concern that could affect sales tax revenue in the state is this. Higher fuel prices will soon translate, actually they already are, into higher prices for other goods and services. As restauranteurs have to pay more to have food shipped in, they'll pass the cost to the consumer, the same thing for furniture stores, hardware stores, and anyone who operates a retail business.
Those Louisiana residents who live on a fixed income will certainly feel the pinch and probably have already had to make some very hard economic choices as higher gas prices take a bigger bite out of their budget. Many people are already talking about scaling back summer travel and vacations too.
So, do higher oil prices benefit Louisiana's tax rolls? Yeah, they do. But they might mean decreases in other revenue streams, such is the crazy world of economics in an oil and gas economy.
Man, that's a lot to think about, maybe we would be happier thinking about this.
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