In the near term, SNWAM has minimal municipal credit risk from falling crude oil prices.
Furthermore, we agree with the Federal Reserve that the U.S. economy as a whole will benefit from lower crude oil prices. The table below from the U.S. Bureau of Economic Analysis shows that oil and gas extraction and support activities are a limited contributor of total Real GDP – only 2.25% in 2013.
However, if crude oil prices remain at sub $60 per barrel of crude oil (bbl) for an extended period of time (all of 2015???), there may be clear winners and losers in the municipal credit space.
Why is $60bbl our level for significant impacts to municipal credits? Well, the chart below is from Citigroup’s commodity team. It diagrams breakeven levels for various shale formations across the United States. We clearly see a jump after the $50 to $60 range per barrel of crude oil. So $60bbl seems like a reasonable cutoff point to determine potential negative and positive impacts from falling crude oil prices.
The winners going forward will be consumption related taxes, such as sales tax revenue, the California and Texas economies, and perhaps also highway user fund revenues.
The loser from $60bbl is Alaska, and we have a neutral outlook for North Dakota and Colorado. In the coming weeks, look for more details and background on major shifts in U.S. oil production and how those shift will impact specific municipal credits.
Sources: SNWAM Research, Citigroup, Business Insider, U.S. BEA
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