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Painful transition for energy states as oil revenues evaporate

From Alaska to Louisiana, the great American oil boom is coming to an end.

For states that are top energy producers, the crash in oil prices has brought a major economic hangover, a loss of tax revenues and big budget shortfalls.

That's a swift reversal from the historic windfall produced by a decade-long U.S. energy boom. A technology-driven revival of an industry that had been in decline for decades sparked a surprise surge in hiring, tax revenues and outside investment that helped lift the economies of states with big deposits of oil and natural gas.

"It really generated a good stable economy with good income growth for workers and good revenue growth for state governments," said Steve Cochrane, an economist with Moody's Analytics. "Now it's all kind of turned on its head."

Now, the impact of the crash in oil prices is being felt unevenly in the U.S. oil patch, a collection of sprawling oil and gas fields that cross state lines. To better follow the impact, CNBC is producing a series of reports looking at which states are feeling the sharpest pain from the drop in lower oil prices.

Of the major energy producers, Alaska, North Dakota, West Virginia and Wyoming have slipped into recession, according to Moody's. (West Virginia and Wyoming — both top coal producers — have also been hurt by a drop in coal production and prices.) The economies of Louisiana, Oklahoma and New Mexico have stalled — but not yet headed in reverse. Only Texas has continued to see its economy expand in all but a few energy-dependent metro areas, according to Moody's.

The varied fortunes of these energy-reliant states has been heavily influenced by a range of factors, from how heavily they rely on oil and gas taxes to how well they've diversified their economies away from oil and gas production.

The Last Frontier

Among top oil producers, Alaska has been hit hardest, by far, from the plunge in crude prices two years ago, largely because it has relied so heavily on oil taxes for so long.

Though the first Alaskan oil well was drilled in 1898 — some six decades before statehood — the modern oil boom in the so-called Last Frontier dates to the mid-1970s when huge reserves were found off the North Slope. The discovery set off a gold rush that drew workers from across the country and tens of billions of dollars of investment in infrastructure, including an 800-mile pipeline crossing the state. In 1977, annual production doubled, to more than 200 million barrels. The next year, it more than doubled again.

The result was a gusher of wealth, much of it captured in the state's permanent fund, a pot of gold created to share the new-found oil riches with the people of the state. Since 1982, every eligible resident has received an annual check of as much as $2,000, their share of the bounty derived from the state's natural resources. Through 2014, some $21 billion has been paid out directly to Alaskans.

Long before oil prices crashed in 2014, though, that source of that wealth began declining. Alaskan oil production has been shrinking since it peaked in 1988 at two million barrels a day; by last year it had fallen to less than a quarter of that.

Now, with oil prices roughly a third of their peak two years ago, the loss of oil revenues has hit the state hard.

Though it ranks fourth among oil-producing states, as recently as 2012 nearly 75 cents of every dollar of the state's revenue came from oil, according to Moody's. Last year, that share had fallen to 28 percent.

That lost revenue has forced the state to cut its capital budget by more than half. Lawmakers in Juneau still face a $4.1 billion budget deficit. Gov. Bill Walker has proposed restoring the state's income tax after 35 years, an idea that has drawn a chilly response from state lawmakers.

But the money will have to come from somewhere other than underground. After decades of reliance on its oil wealth, Alaska's remaining tax base is much less diversified than any other state. That will make the budget gap extremely tough to close, according to Gunnar Knapp, director of the Institute of Social and Economic Research at the University of Alaska.

"In just four years, most of the money we had been using to pay for state government evaporated. It's gone, he said in a recent report on the state's finances. "That's why we have a big problem."

As a result, Alaska now faces tough choices about where to cut spending and raise revenues. Proposals to close the gap include cuts in funding for early childhood education to new fees for state-run assisted living facilities.

But delivering government services to the largest, most-sparsely populated state poses unique challenges. With a rural population of a quarter-million people spread over a sprawling wilderness of more than 570,000 square miles, consolidating schools districts or closing regional facilities creates hardships not felt in the lower 48.

"There are communities or boroughs that are heavily, heavily dependent on government," said University of Alaska economist Mouhcine Guettabi. "And so if we are to go through with some of the cuts that we are currently discussing, then those communities that don't have a basic industry that's driving them, that's generating jobs, that's retaining qualified individuals, then those communities are going to be considerably more vulnerable."

Government jobs cuts also hit the state's economy harder than most. Roughly one in four workers in the state is employed by government, according to the latest BLS data. Only Wyoming and Washington, D.C., have a bigger government payroll as a share of total employment.

All of which makes Alaska's budget pain an outlier among big oil-producing states. While its per capita public spending is highest in the country, revenues from sources other than oil and gas are among the lowest.

North Dakota, by comparison, is feeling less pain from the loss of oil taxes.

As home to the Bakken oil field and one of the biggest beneficiaries of the modern U.S. oil and gas boom, North Dakota has also enjoyed a tax windfall from a surge in energy production taxes. As of last year, these so-called severance taxes made up more than half of the state's revenue.

But North Dakota has insulated itself somewhat from the crash in oil prices, largely because its windfall came relatively recently. That meant it's had less time to find ways to spend those oil and gas riches. The state has also reduced its reliance on energy revenues with a cap on oil revenues of $300 million every two years.

"(North Dakota) hasn't overspent," said Moody's Cochrane. "They've been very, very cautious and conservative in their in budget projection and their projection for what they energy revenue might be."

Among major oil and gas producer, Texas also has escaped relatively unscathed so far.

Though the state is by far the largest U.S. oil producer, and the biggest beneficiary of oil and gas taxes in dollar terms, the state has a much wider tax base than other oil states. Only about 10 cents of every tax dollar in Texas comes from oil and gas production, which has helped ease the pain as those revenues have dried up.

The state also has a more widely diversified economy than other energy producers, which helps blunt the impact of lost jobs and investment in energy production. As a result, Texas is producing jobs faster than other big energy producing states, which has helped ease the economic impact of the oil price crash.

Neighboring New Mexico, the sixth-largest oil-producing state, has also fared relatively well, in part because it relies less on oil and gas taxes. And oil production has continued to rise, helping to offset the drop in oil prices.

Other oil-producing states face varying degrees of economic and budget pain. Louisiana, which counts on oil taxes for 16 percent of its general fund, has cut revenues projections for the 2015 and 2016 fiscal years by more than $300 million because of lower oil prices, according to Moody's.

In Louisiana, Democratic Gov. John Bel Edwards has proposed a series of measures to close a state budget gap estimated at nearly $750 million by Fitch.

Oklahoma has also seen oil revenues dry up, and state lawmakers are projecting a shortfall of more than $1 billion in the state's $24 billion budget. The funding gap is expected to widen next year. To help fill the gap, the state's board of education voted in January to cut $47 million about 3 percent — from public education spending. That gives the state's school districts less than six months to make the cuts needed to hit those targets.

As they struggle to make up for lost tax revenues, oil-producing states are also holding out hopes that the oil prices may yet recover and help restore budget balance. But with the world awash in oil, the result of the production boom that generated the windfall for states in the first place, most forecasters believe that's wishful thinking. (The latest Energy Department forecast, for example, sees crude oil prices rising to just $40 a barrel through next year.)

At that price, oil producing states will continue to face the economic and political fallout from the unwinding of their energy windfall for the foreseeable future.

"That's the resource curse," said Cochrane. "Especially when a government becomes overreliant on a single resource."

Correction: This story was revised to correct that it was Louisiana Gov. John Bel Edwards who proposed a series of measures to close the state's estimated budget gap of nearly $750 million.

Updated: This story was updated to reflect that Alaska now has a $4.1 billion budget deficit.

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