While West Texas Intermediate (WTI) oil prices have slipped nearly $3.50 a barrel since January—hovering uncomfortably around $68—New Mexico lawmakers just gave oil producers something else to stew over: higher royalty rates.

Senate Bill 23, which passed the House of Representatives on Thursday, is now sitting on Governor Michelle Lujan Grisham’s desk. The bill raises the maximum royalty rate on the state’s premium oil and gas leases from 20% to 25%—the first change since 1970, when disco was en vogue and the EPA started to have second thoughts about leaded gasoline.

Supporters, including Land Commissioner Stephanie Garcia Richard, say this is a no-brainer. After all, the money flows straight into the state’s coffers to fund public schools, universities, and hospitals. “It’s the logical thing to do,” she said, pointing out that the new rate finally matches what private landowners and the state of Texas already charge.

Maybe.

But there’s a catch: producers aren’t exactly rolling in it right now. Harold Hamm recently said Brent oil needs to be closer to $80 to make drilling worthwhile. At $68 WTI—and with futures down around $63—it’s hard to blame operators for squinting at the math.

Rep. Mark Murphy, an industry veteran and Republican from Roswell, warned the House that prices are heading in the wrong direction and that pushing royalty rates higher could backfire—possibly encouraging companies to cap wells early or skip out on leases altogether.

And all of this unfolds as former President Trump rallies for a full-throttle return to “Drill, baby, drill”—while also promising lower gas prices at the pump. How those two things are supposed to coexist without defying basic economics is unclear unless drilling costs come down. This action flies in the face of that.

New Mexico clearly wants more bang for its land buck. The oil patch, however, may soon be asking if that extra 5% cut is worth the squeeze if barrels barely pay the bills.

By Julianne Geiger for Oilprice.com

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