New Mexico produces more oil than any other state besides Texas, and the state’s revenue from taxes, royalties and lease sales helps cover the cost of college tuition, all school meals, health insurance and a new initiative for free universal child care.

Now that oil prices are surging from the conflict with Iran, money is flooding into the state treasury and creating an uncomfortable situation for Democrats who oppose the war and would rather reduce their reliance on fossil fuels.

“It’s hard for people to think about, ‘Oh great, we have this windfall,’ and children are getting killed on the other side of the world,” said Deb Haaland, the former U.S. Interior Department secretary running for governor.

Haaland is one of two Democrats running to succeed Gov. Michelle Lujan Grisham, who is wrapping up her second term in office. A former congresswoman and state party chair, Haaland worked to limit unfettered oil and gas exploration while serving in President Joe Biden’s Cabinet.

Now she wants to use money amid the energy boom to increase New Mexico’s child tax credit and boost the refundable working families tax credit, payouts that would most benefit people with low incomes.

“We have obligations to try to have a better world overall,” said Haaland, a member of Laguna Pueblo who could become the first female Native American governor in the U.S. “I think we can do that.”

Her rival for the Democratic nomination, Albuquerque-based District Attorney Sam Bregman, said he wants to offset inflation with one-time $500 checks from the state to residents making less than $200,000 a year. He also wants to waive personal income taxes on residents 65 and older.

“It is the resources of the people that’s generating that revenue,” he said. “We ought to give it back to the people.”

For every $1 fluctuation in the average annual price of oil, New Mexico sees a roughly $59 million swing in state government income.

That means the state is likely to see a $850 million surge in annual state government income for the budget year ending in June alone based on war-time price changes — equivalent to 12% of annual general fund spending, according to the state Legislature’s budget and accountability office.

New Mexico sends much of its relatively heavy crude oil from its patch of the Permian Basin to Texas distribution hubs and refineries along the Gulf Coast. Prices could remain high with no end in sight for the war despite a fragile ceasefire.

A nest egg that moderates dependence on oil

In New Mexico, surges in oil income automatically flow into a series of trust accounts designed to gradually reduce the state’s reliance on fossil fuels, helping the state generate investment income to underwrite Medicaid, early childhood education, infrastructure projects and an expansion of mental healthcare.

The strategy has tempered discomfort among many Democrats with dependence on oil income, in a state with entrenched swaths of extreme poverty and the nation’s highest enrollment rate in Medicaid.

“For New Mexico and New Mexicans and especially the progressive left — which sort of controls the state — it’s always something they really don’t want to admit or talk about or get angry about,” said Lonna Atkeson, a political science professor who has analyzed voting behavior in New Mexico and directs the LeRoy Collins Institute at Florida State University. “Like, ‘We should not be funding our stuff with that money.’ I’ve heard those arguments.”

The winner of this year’s governor’s race will take the helm of a state investment council overseeing a roughly $68 billion state nest egg, including investments that defray costs for K-12 public education.

New Mexico is not alone in reaping the financial benefits of the war. In Alaska, the state forecast an additional $1.05 billion for the current fiscal year and the one beginning July 1.

“It really is this small group of energy-reliant states like North Dakota, Alaska, New Mexico and Wyoming that are going be affected most directly,” said Justin Theal, who researches state fiscal trends as a senior officer for The Pew Charitable Trusts. He described the situation as “a double-edged sword.”

“It raises costs for households and businesses which can potentially dampen consumer spending and reduce sales taxes that almost every state relies on as well,” Theal said.

Wartime oil prices hold silver lining for New Mexico

Three contenders for the Republican nomination are advocating for even more aggressive tax relief while oil prices are riding high.

“Republicans are using the ‘e-word’ — eliminate income taxes,” said Albuquerque-based pollster Brian Sanderoff, president of Research and Polling Inc. A Republican last won election to statewide office in 2016.

At the same time, they’re questioning whether universal childcare will be financially sustainable.

The program is coming under direct fire in a lawsuit from cannabis entrepreneur and Republican candidate for governor Duke Rodriguez. He previously served as human service secretary under former Gov. Gary Johnson, a crusader for limited government who unsuccessfully ran for president as a Libertarian.

The lawsuit alleges the childcare program was implemented in November by Lujan Grisham without required authorization from the Legislature — though supporting legislation was passed this year. A court has ordered the administration to respond within 30 days.

Reflecting on the state’s oil income, Rodriguez says, “We don’t have a resource problem, what we have is a real results problem. We just spend and spend and spend with no accountability.”

Republican businessman Doug Turner describes wartime oil prices as an opportunity to overhaul the state tax code and wants means testing for childcare benefits. He lost the 2010 Republican primary to then-district attorney Susana Martinez, who went on to serve two terms as governor.

Gregg Hull, a former three-term mayor of Rio Rancho on the outskirts of Albuquerque, wants New Mexico to join the ranks of states with no personal income tax like Texas and Wyoming. Personal income taxes account for about $2.2 billion in annual state government income, offsetting about a fifth of annual general fund obligations.

Hull said he wants to double down on the oil economy by funneling budget surpluses to infrastructure projects in the state’s main oil-production zone.

“This morning, when I was looking at a price of a barrel of oil, I said, ‘Well, that’s not great for consumers, but it’s awesome for New Mexico,’” Hull said.

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Associated Press writer Becky Bohrer in Juneau, Alaska, contributed to this report.