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Higher fuel costs driving up state revenue

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OKLAHOMA CITY (AP) -- It was just over a year ago that Oklahoma petroleum prices were at their lowest level since the Great Depression.

Today, Oklahomans are paying more than double last year's price for a gallon of gasoline and the state leads the region in gas prices at $1.77 a gallon.

While motorists dig deeper in their pockets to keep up with rising fuel costs, higher oil and natural gas prices have created are venue windfall for the state in gross production tax collections.

"The turnaround in the oil patch has been nothing short of tremendous," said Shawn Ashley, public information officer for the Office of State Finance.

While the gross production tax produced $43.5 million during the fiscal year that ended June 30, nearly $89 million -- more than twice as much revenue -- has been collected during the current fiscal year with one month left to go, the state finance office said.

But higher crude prices have not revived exploration and drilling activity in Oklahoma's oil patch.

The Oklahoma Corporation Commission, which regulates the oil and gas industry in the state, reported that in March, when crude oil prices rose 2.7 percent, crude oil production dropped 13.2 percent.

"People are still shell-shocked from the lowest prices they've seen in their lifetime," Corporation Commissioner Denise Bode said.

"They're paying off debts still. You've got people selling out."

"There's a consolidation going on," said Mike Cantrell, an oilman from Ada who sold his oil production business, Oklahoma Basic Economy Corp., on June 1.

Cantrell filed a complaint with the International Trade Commission and the Commerce Department last year that accused members of the Organization of Petroleum Exporting Countries of causing domestic oil prices to collapse by illegally dumping oil at below-cost prices.

OPEC controls 40 percent of the world's daily crude oil production, but controls 77 percent of global oil reserves. Currently, the U.S. imports about 60 percent of its oil.

"Oil is a commodity whose price is dictated by a cartel. The price has always been volatile," Cantrell said.

"I had the opportunity to get myself out of the game at a time when prices were high. I think the future is still good for oil in Oklahoma. I think the future is better for natural gas."

The spot month contract for light sweet crude was more than $32 per barrel on Friday. And crude prices are likely to remain steady or rise still higher in part due to tightness in U.S. gasoline markets, according to a report by the International Energy Agency.

The oil bounty has created a dilemma for Oklahoma lawmakers who are eager to spend the state's new petroleum riches but wonder how long it will last.

"Gross production taxes and revenue from them come from a volatile commodity," Ashley said.

"As we saw in the '80s, as we saw only a year-and-a-half ago, prices can go south and they can go south quickly. From a state budget perspective, that means we have to be cautious in the way we rely on these revenues," he said.

Tax revenue from oil and gas production once accounted for more than 25 percent of all state revenue. But Paula Ross of the Oklahoma Tax Commission said the state's gross production tax now raises only 5 percent of state revenue.

By comparison, the state sales tax raises 25 percent, the individual income tax produces 37 percent and car tag taxes produce 14 percent of the state's revenue, Ross said.

Although not at the level it once was, the gross production tax has become a boon for education funds created by the Legislature last year.

During the first 11 months of the current fiscal year, more than $22.4 million was collected by each of three funds dedicated to education technology, scholarships and capital improvements.

"Those special funds for education are benefitting tremendously," Ashley said.

"So, too, are schools districts and counties who get a share of this revenue."

But Oklahoma oil producers who are still recovering from last year's debacle are cautious about re-investiing in the domestic oil industry. Many are getting out of the business altogether.

"It's terribly sad," Bode said. "I think we should believe in our domestic industry."

Producers are uncertain about the future of the market and don't trust OPEC.

"They flooded our market to bring the prices down to gain market share. And they did that," said Cantrell, who is still active in Oklahoma's natural gas business.

"Once they gained market share, they raised the price again. I just got tired of that kind of manipulation."

Bode said domestic producers are at OPEC's mercy if the cartel increases oil output to lower the world prices, thereby cutting domestic production.

Bode and Gov. Frank Keating have called for a national energy policy to lessen the nation's reliance on foreign oil and provide economic incentives to encourage domestic production.

"Would it stop the decline of oil production in Oklahoma? I don't know. It would certainly slow it down," Bode said.

"OPEC simply has us by the throat because there are not enough domestic sources to temper its effective control of U.S. supply. We must have a national energy policy," Keating said.

Bode said the policy should include oil production on federal lands that are not environmentally sensitive, incentives for production in marginally-economic wells, royalty holidays and an enhanced oil production tax credit for marginal oil fields.
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