Alaska’s oil price over $85 a barrel, but industry watchers urge caution in the long term
JUNEAU, Alaska (KTUU) - Alaska’s North Slope crude oil price has recently been at its highest level since October of 2014, a trend that could add hundreds of millions of dollars to the state treasury. But industry watchers are urging caution in the longer term.
For the past two weeks, North Slope crude has been hovering around $85 per barrel and tipped over $86 on Thursday. It was around those prices briefly in the fall of 2018, but it hasn’t been consistently at those levels for seven years.
Alexei Painter, head of the nonpartisan Legislative Finance Division, presented to a House of Representatives committee on Friday, showing how oil prices have averaging around $75 per barrel since the start of the fiscal year on July 1. His data shows that if oil prices stay high, the state could collect $500 million more in oil revenue over the fiscal year that starts next July than it projected in spring.
Over the fiscal year that ends on June 30, the state could see an additional $600 million in oil revenue than expected earlier.
Brad Keithley, managing director of Alaskans for Sustainable Budgets, said oil futures markets are the best way to predict which way prices are going as they show where big-money investors are putting their cash. He said that data shows this trend is transitory and a near-term phenomenon.
In the longer term, futures markets predict oil prices will drop below what the Alaska Department of Revenue forecast for the middle and end of the decade, Keithley said, meaning Alaska would be in a tougher spot for available revenue.
“You really have to look beyond that to understand the full situation,” Keithley said about recent high oil prices.
Larry Persily, a former deputy commissioner of the Department of Revenue, said these prices may be beneficial for state coffers, and tough for consumers, but they won’t help fix an unbalanced budget in the long term.
“It relieves some of the pressure, the state doesn’t have to worry about checks bouncing as it would at $30-oil, but it doesn’t solve the fundamental problem that there’s not enough money to pay for all the services that people want plus a big dividend,” he added. “It’s a temporary respite which isn’t going to solve anything permanently.”
The state relies on Permanent Fund earnings to pay for over two-thirds of government spending and Alaska’s oil production has declined since peaking in the late 1980s. Oil prices are also highly volatile, Persily explained, and prices could drop for a number of reasons, including if U.S. shale oil production unexpectedly increases.
But the influx of unexpected revenue does pose questions for legislators who have been trying to end the Permanent Fund dividend debates. A bipartisan legislative working group called for a new 50-50 constitutional dividend formula, perhaps increasing to that figure over several years, and new revenues to pay for it and the budget.
There has been some committee work to discuss fiscal fixes following that framework during the ongoing fourth special session, but no progress in passing bills to make that plan a reality.
Higher oil prices make the fiscal picture look better, but Persily and Keithley say it increases the chances that lawmakers will delay making tough choices, like implementing new taxes, during next year’s regular legislative session that starts in January.
“There was already that risk because we’re in an election year next year, and they were looking for ways to kick the can down the road to avoid making a hard decision during an election year,” Keithley said. “But I think this will certainly add fuel to that fire.”
The Legislature will also have roughly $500 million in federal coronavirus funding to spend next year. When added with the anticipated extra oil revenue, lawmakers could be tempted to spend the next regular session discussing how to appropriate larger dividends or spend more in the annual budget.
“I think that’s what many legislators will be focused on doing,” Keithley said.
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