HISTORY REPEATS: New Mexico follows Alberta’s failed attempts to raise royalties as oil prices fall

A word to wise: just don’t.

As New Mexico moves to increase royalty rates on its most lucrative oil and gas leases, history offers a cautionary tale about the risks of raising levies in a declining market. 

State legislators need only to look at Alberta’s past experiments with royalty hikes under former premiers Ed Stelmach and Rachel Notley to learn how well-intentioned policies can backfire, leading to investment uncertainty, economic downturns and ultimately, little additional revenue.

New Mexico’s state House of Representatives narrowly passed a bill to hike oil and gas royalties on prime parcels by 20% in a narrow 37-31 vote. It’s the first time New Mexico has raised rates since the 1970s.

Lawmakers justified the increase on the grounds that oil and gas revenues directly fund education and is expected to raise an additional USD$50 million to $75 million annually. But critics say it will only discourage investment and siphon off activity to neighbouring states like Texas that have more attractive fiscal regimes.

And in fact, the changes would affect counties straddling the prolific Permian Basin on the Texas border, America’s most prolific oilfield accounting for about half of the country’s entire oil production.

And New Mexico is emerging as the fastest growing oil region in the US, pumping about 2.1 million barrels of oil per day (bpd) — about double Saskatchewan — or 16% of Lower 48 production. That figure is 10 times greater than it was in 2010, according to the US government’s Energy Information Administration (EIA).

It also produces about 3.1 million cubic feet (MMcf) per day of natural gas. That compares to about 11 MMcf per day in Alberta.

In that regard, it would do well to look north when it comes to royalties.

In 2007, former premier Ed Stelmach sought to extract a greater share of resource wealth for taxpayers by implementing a new royalty framework designed to increase government revenues. 

The result? An exodus of investment, particularly from smaller producers, and a rapid reversal of the policy just a few years later.

Likewise, Rachel Notley’s government in 2015 was elected on a promise to “modernize” royalties, and commissioned a comprehensive review that created months of gut-wrenching uncertainty. 

When the dust settled, the changes were largely cosmetic as the government recognized that any significant hikes would deter investment during a commodity downturn. After much political and economic anxiety, the province gained little in the way of additional revenue — or investment certainty.

Now, New Mexico Land Commissioner Stephanie Garcia Richard is arguing that her state is leaving millions on the table compared to private leases and neighboring Texas. The measure has gained legislative traction, but critics warn of unintended consequences.

Industry leaders argue that, much like in Alberta, increasing royalties in a volatile price environment could accelerate consolidation and squeeze out smaller producers. If market conditions deteriorate, higher royalties may lead to fewer leases being sold, undermining the revenue gains the policy aims to achieve.

Opponents of the increase, including the Independent Petroleum Association of New Mexico, argue the timing is particularly risky. “Increasing royalties now in a declining market will disincentivize bidding at a time when fewer bidders are coming forward,” said association president Jim Winchester.

Meanwhile, US president Donald Trump’s proposed tariffs are poised to protect inefficient domestic industries at the expense of free-market competition even as it strives for so-called global energy “dominance.” 

While some sectors may benefit from protectionist measures, the oil and gas industry — which operates in a global marketplace— could face disruptions.

How does Canada fit into this cautionary tale?

Alberta Premier Danielle Smith has resisted calls to impose reciprocal export taxes on Canadian oil in response to potential US tariffs. While such a move could be politically expedient, Smith warns it would likely trigger a massive energy crisis in the US, given America’s reliance on Canadian crude that could backfire.

Yet, as history shows, government intervention—whether in the form of tariffs or royalty hikes—often leads to unintended consequences. In Alberta, previous royalty overhauls created uncertainty without delivering the expected financial windfall.