THE DOWNSTREAM CONSEQUENCES OF LOUISIANA’S ECONOMIC DEPENDENCE ON OIL

The “oil and gas state” is suffering economically as the local industry declines

Editor’s note: This article is part of a collaboration between APM Research Lab and the Ten Across initiative, housed at Arizona State University.

by MAYA CHARI | January 9, 2025

Since the first discovery of crude oil in the state of Louisiana in 1901, the commodity has been inextricable from Louisiana’s economy. But the industry is faltering. Oil production in the state has been falling for over 50 years, and bankruptcies and layoffs are now common.  

According to experts, this long-term trend is unlikely to reverse, even under President-elect Donald Trump, who has promised to increase oil and gas drilling in an effort to reduce gas and energy prices.  

In 2022, the oil, gas and petrochemical refinement sectors represented 14% of the state’s total GDP. But that’s down from 33% in 1999. 

Mineral revenues, state proceeds from taxing oil and gas extraction, have declined starkly from historical levels. Prior to the 1960s, mineral revenues made up around 60% of the state’s annual revenue. Now, they make up around 4.5%. 

Meanwhile, Louisiana’s economy has stagnated and faltered. In 2000, Louisiana ranked 6th in the nation for five-year average GDP growth. In 2024, it ranked 49th. The state also has the second-highest poverty rate in the nation, and median household income has been trending down since 2019.  

Moody’s Ratings, a credit ratings agency, ranked the state’s credit as “moderately negative” due to overreliance on fossil fuels, high income inequality, and vulnerability to climate change. The report stated that economic diversification could help bring Louisiana’s GDP growth in line with the rest of the nation. 

Yet despite the economic drawbacks, Louisiana’s state officials continue to double down on fossil-fuel subsidies. 

The role of oil and gas in Louisiana’s economic development 

       Oil was first discovered in Louisiana by Anthony Lucas, a miner who discovered traces of oil while mining salt on Avery Island in 1901. Lucas was then hired by Texas-based oil industry investors to find the source of the oil. He and his team successfully tapped Spindletop Oil Field, the first major oil reserve in the United State. This led to a boom in oil production in the state, and a rapid shift from an agricultural economy to an extractive one.  

The first natural gas pipeline was established in 1908, transporting gas from Caddo Field to Shreveport. Natural gas provides the majority of Louisiana’s domestically consumed electricity, and the state also exports natural gas and gas-generated electricity. Methane, the main component of natural gas, is also used to create plastics, fertilizers and pesticides, as well as chemicals like ammonia and hydrogen. 

Louisiana’s oil-friendly government 

Huey Long, who was elected Governor of Louisiana in 1928, is often credited — or blamed, depending on who you ask — with cementing the state government’s relationship to oil and gas. Long and his immediate successor established a legal and tax framework that allowed heavy industry to operate in the region with minimal regulation.  

Politicians like Long presented a framework in which heavy industry, lured to the state by friendly legislation, would pay taxes that allowed the state to fund social programs without high taxes on citizens.  

The pro-business side of Long’s plan has had an enduring impact on Louisiana policy, which still provides some of the most generous subsidies to industry of any U.S. state. One of the most prominent examples is the Industrial Tax Exemption Program (ITEP), established in 1978, which exempts many industrial manufacturers from paying local property taxes for up to 10 years.  

But the public services funded by oil taxes haven’t materialized, according to Logan Burke, the executive director of the Alliance for Affordable Energy, a nonprofit which advocates on behalf of Louisiana’s energy consumers.   

“Our state elected officials have always been very supportive and protective of the oil and gas industry, despite the fact that it’s clearly not doing much good if almost 19% of our population is living below the poverty line,” said Burke. 

Louisiana’s tax code is quite regressive, levying higher taxes on lower- and middle- income households than on higher- income households while being friendly to corporations.  

While that describes most tax codes in the United States, Louisiana’s is ranked the tenth-most regressive in the nation. 

Burke described Louisiana as a victim of the “resource curse,” a phenomenon in which areas with natural resources end up having those resources extracted and sold on the international market, to the benefit of a few companies and the detriment of residents, who seldom see any of the money.   

Economies that are overly reliant on oil in particular are sometimes referred to in political science as petrostates. Research on petrostates shows that they tend to suffer from political corruption and high levels of inequality. Some economies have managed to avoid the oil curse, but they generally already had stable democracies and relatively prosperous populations when oil was discovered.  

In one such country, Norway, the government established a fund to invest excess oil revenues to fund future pensions. This was a deliberate effort by the Norwegian government, as the Norwegians had observed the resource curse’s effect on other countries such as the Netherlands. Taxes on the industry are quite high—78% of all profits, as opposed to 28% for other industries.  

Within the U.S., Alaska’s government has also made an effort to share oil revenues with residents. In 1976 Alaska’s constitution established the Alaska Permanant Fund, which pays out an annual permanent fund dividend of around $1,606 to Alaska residents. Louisiana has no equivalent.  

 Huey Long faced strong challenges when attempting to pass his proposed taxes on oil. Standard Oil once bribed the state legislature to prevent Long from passing an oil-processing tax. And Long himself was far from immune to the lure of oil money. In 1936, he founded the Win or Lose Corporation. Long used his government position to lease state lands to the corporation, which then re-leased them to oil companies at a substantial profit—a practice that while controversial, was legal. 

 
“The folks who are extracting and not living there, it doesn’t matter to them if the roads don’t work or the schools don’t have books. What matters to them is their profit margin and their responsibility to shareholders,” said Burke.  

Issues caused by Louisiana economy’s dependence on oil 

For an energy economy to thrive, global energy prices have to be in a “sweet spot.” If prices are too low, selling oil or energy becomes unprofitable. If they’re too high, it’s likely that a flurry of production will result, creating a surplus of oil or gas and driving prices down again.  

After a global oil surplus caused prices to fall in 2014, Louisiana’s oil industry laid off nearly 20,000 workers and closed several offshore production platforms. The state subsequently entered an economic recession and suffered a budget crisis. Although the dip in prices was temporary, the industry’s shrinkage in the state proved to be permanent.  

Oil-dependent states, including Louisiana, also had a slower economic recovery from the COVID-19 pandemic. 

Additionally, because Louisiana’s economic output also depends on using large quantities of natural gas as an input, high prices can have other negative economic effects.  

For instance, when Russia invaded Ukraine in early 2022, natural gas prices spiked to three or four times their previous levels. With both feedstocks and electricity costing more, many producers of natural-gas-based chemicals had to scale back production.  

“It’s largely unknown when these things happen, how much prices are going to spike and for how long,” said Burke. 

The slow decline of oil and gas in the state 

Louisiana oil production peaked in 1970, with 566 million barrels produced, and has been in decline since. That decline has continued over the last decade, even as total U.S. drilling for oil has increased under each of the three previous presidential administrations. 

Natural gas production from most sources also declined for several decades, until hydraulic fracturing technology, known as fracking, made previously hard-to-reach deposits available and led to an increase in fracked gas volumes. 

But those same techniques led to an oversupply in the market, driving prices down. As a result, fracking hasn’t resulted in increased profits for Louisiana’s industry. 

As state oil and gas production has declined, Louisiana’s economy has shifted downstream, towards refining and transmitting hydrocarbons – products and chemicals made from oil. 

 However, that sector is subject to its own challenges. Ethylene and methanol, two of Louisiana’s primary petrochemical exports, are now oversupplied globally. Renewable alternatives are increasingly available, and China, previously a key importer of ethylene, has reduced its imports by 40% since 2018.  

The perils of offshore drilling 

Much of Louisiana’s oil comes from offshore drilling, which is risky, expensive and technically complicated. It becomes more so as companies deplete easier-to-reach deposits and venture into more sensitive areas.  

Even in the early days of oil production, storms sometimes destroyed rigs and killed workers. Climate change has exacerbated the problem. It’s typical for hurricanes to result in malfunctions and gas flares at petrochemical plants. One refinery in Plaquemines Parish, Louisiana, permanently closed after sustaining damage during Hurricane Ida. 

The most major and publicized oil disaster came in 2010, when BP’s Deepwater Horizon rig, located 50 miles south of New Orleans, exploded, killing 11 workers and seriously injuring 17 others. In addition to the human cost, the explosion released 189 million gallons of crude oil into the Gulf of Mexico, creating the largest oil spill in U.S. history.  

The spill had a large negative impact on the fishing and tourism industries, two major non-petrochemical drivers of Louisiana’s economy. One NOAA report estimated $2.3 billion in losses from fishing revenue alone. 

The state’s failure to pivot away from fossil fuels 

Louisiana’s state government has not given up courting fossil fuel companies. As of 2024, 24 oil and gas companies are planning expansions in the state, receiving $6.8 billion in tax exemptions. An Institute for Energy economics report warns that these projects “risk wasting substantial amounts of taxpayer dollars.” 

Energy researchers say Louisiana’s history with offshore drilling has given it the workforce and conditions necessary for substantial wind energy production. The 2022 Inflation Reduction Act (IRA) increased tax credits for these projects. But the state’s renewable energy industry is still in its infancy. In 2021, just 4% of Louisiana’s energy came from renewables, compared to around 20% nationally.  

Louisiana’s governor, John Edwards, has presented a plan for carbon neutrality by 2050, while also saying that fossil fuels are “not going anywhere” and have “decades left.” Meanwhile, oil and gas industry advocates push for a “slow transition.”  

Part of this slow transition includes carbon capture facilities, which are designed to capture carbon dioxide from industrial processes and inject it into wells underground, sometimes as part of an enhanced oil recovery technique. 

The IRA extended and expanded the 45Q tax credit, which subsidizes carbon capture and sequestration (CCS) projects.  

As of October 2023, the nonprofit Environmental Integrity Project tracked 43 proposed CCS projects in Louisiana — meaning that almost half of the 93 proposed CCS projects in the U.S. are in Louisiana. 

 None have yet been built, and some proposed storage facilities are sparking outcry from local communities. Many of these facilities are owned and operated by oil and gas giants like ExxonMobil. 

Carbon capture has been met with skepticism from experts as well as communities. The Institute for Energy Economics report calls it “unproven and expensive,” and states that “Louisiana would benefit if federal incentives were deployed on more effective and sustainable initiatives.” 

Abishek Sinha, a contributing author on the report, points to similar projects in other states, which weren’t successful. Sinha is an equity analyst and former engineer who began his career in the oil and gas industry.  

He pointed to  researching showing that carbon capture will likely require permanent government subsidies to be financially viable. 

“In Indiana and Mississippi, industry claims of CCS prowess proved overstated,” he said. “Both projects failed. None of the companies have offered evidence that lessons have been learned.” 

The future of oil and gas in Louisiana  

Burke said that because of the practical obstacles, she doesn’t expect the president-elect's pro-drilling rhetoric to translate to expanded drilling in Louisiana. 

New oil wells, she said, just wouldn’t pencil out financially. In fact, there are many wells off the Gulf that are still technically viable but have discontinued drilling due to diminishing profits. 

Rather, she expects the pivot towards carbon capture to continue — though she agrees that the technology is not viable and considers it an attempt by fossil fuel companies to improve their standing in the public eye while continuing to pollute. 

“Instead of ‘What are companies going to be extracting from Louisiana?’ the question is more ‘What are they going to be dumping in Louisiana?’”  

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