Monday, November 2, 2015

Will Collapsed Oil Prices Drive Your Kids' College Tuition Sky High?

While many people may have read about the collapse in oil prices, from a high of $100 a barrel in June, 2014 to an international benchmark of $50 a barrel now - few may have made the connection to how these prices adversely affect college funding in energy- heavy states.   As a recent Denver Post piece ('Millions of Reasons for Colleges To Worry') has noted, however, there is lots of cause to worry. In particular, how colleges in the energy states (TX, OK, AK, LA) may have to jack up tuition to make up for donation losses.

As the piece observes:

"The latest bust and tumbling crude prices are now pinching off the largesse that helps universities in oil-rich states afford what they want when state budgets are strained, which is especially the case now. Already the consequences are becoming obvious"

A few examples cited (ibid.):

- Campus construction projects are being stretched or put in limbo (the Univ. of Oklahoma has already scaled back a planned $370m stadium renovation)

- Scholarship funds are taking a hit across the Southwest

- Donors are asking for more time to make good on pledges (at LSU, energy sector gifts have fallen from a quarter of all fund raising to one tenth)

All told, U.S. colleges received some $38b in charitable donations in 2014, according to the Council for Aid to Education - a "sum that helped to make up for the continuing appropriations from state governments".  That sum now stands to be decreased, with the result that "tuition hikes are back on the table" at many colleges and universities such as in Texas. (Ibid.)

As the piece notes (ibid.):

"Texas' public universities are closely tied to oil because the royalties from the state's 2.1 million acres of oil and gas lands go directly to the University of Texas and Texas A&M system. But only a dozen of the previously 100 -plus rigs in the Permian Basin shale are working".

It has simply become too unprofitable to run them when the price dives below $60 a barrel because the extracted energy is too near the breakeven point. (Cost of energy extracted equals cost of energy put in to get it.)

Is there any sense this might soon change for the better? Not according to a headline article in the Wall Street Journal Business & Tech section, 'Oil Giants See No Relief On Prices' (October 30,p. B1).  As noted therein:

"Continued oversupply means that next year, Brent crude prices will average $58 a barrel and West Texas Intermediate, the U.S. oil benchmark, will average $54 a barrel,  according to 13 investment banks polled by The Wall Street Journal. Many of the same banks were predicting $70 a barrel in 2016 just a few months ago."

Recall that as recently as Aug. 21,  the Wall Street Journal ('As Rout Deepens, Oil Producers Keep on Pumping',  p. A1) reported:

"When oil prices started to edge down a year ago, most energy mavens thought the drop would be small and short lived. Instead the price of crude has plunged by almost 60 % from its 2014 peak  - and suddenly looks likely to stay low for years and months to come."

What happened? The oil producing nations including the U.S. (with fracking for shale oil or kerogen) simply couldn't put a lid on their production even when it was blatantly obvious more oil would drive prices lower - because of oversupply. Everyone appeared to be "locked into pumping as much oil as possible" (WSJ, 8/21) to the detriment of all.  As the Journal noted (ibid.) even the Saudis had increased their production in the face of falling prices.  The result has been "an energy version of trench warfare, with producers all trying to gain an inch of market share no matter the cost."

(Note:  On Thursday, according to the 10/30  WSJ piece, "Brent crude settled at $48.80 a barrel while WTI ended at $46.06 a barrel.")

Again, bear in mind oil - including shale oil - doesn't emerge from the ground without cost. It takes a lot of energy just to extract it, not to mention store it and transport it.

You might want to consider that if your kid is attending college in an "oil state" his tuition will likely go up next year which means also higher college loan debt. It's much better to be prepared for this beforehand than get surprised at the last moment.

No comments: