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Is oil revenue-dependent Alaska headed for a market reckoning?

Alex DeMarban
A glut of oil in the Lower 48 has analysts increasingly predicting that oil prices could drop in the months to come. But if it lasted long, such a decline would be problematic for Alaska, where the government budget largely depends on oil production and where one third of all jobs depend on money generated in its oil patch. Pictured are pipes at an oil drillsite in Williston, North Dakota, 2011. Lindsey Gira / cc via flickr

Oil moving west by train across the heart of the country and the shale-oil boom in Texas and North Dakota have analysts increasingly predicting that oil prices could head south in the months to come.

Such a decline, if prolonged, could be problematic for Alaska, where the state budget is funded largely by income from oil production and one-third of all the jobs depend on the money generated by oil.

If the prices of North Slope crude fall low enough for long enough, it could also mean oil companies might reduce their investment in costly Alaska, reducing the possibility of new discoveries to turn around dwindling production.

Fadel Gheit, an analyst at Oppenheimer, said that oil prices are notoriously hard to predict, in part because no one knows what will happen in the Middle East, where increased tension could shoot oil benchmarks higher.

But market fundamentals of supply and demand indicate that the price of oil is more likely to fall than rise. Key to the equation is the shale-oil boom that has produced a glut of oil in the Lower 48.

"I am not forecasting $75 a barrel oil," he said. "I am saying in a perfect world, based on supply and demand, oil prices should not be above $75."

The price of oil for Alaska North Slope crude has hovered a little above $100 for most of the year, close to what analysts with the state forecasted.

That stability also puzzled some analysts, who had expected lower prices this year. But supply disruptions related to international sanctions against Iran, and civil unrest in countries such as Syria and Sudan, led countries such as China and Saudi Arabia to stockpile oil for strategic purposes. That helped keep prices high, an economist with BP said in August.

At the time, Alaska crude was going for $110. But it's fallen lately, dropping to $103.20 on Wednesday.

The drop comes as part of a potentially "startling development," said RBN Energy, a consulting company based in Houston. The price of Alaska crude no longer seems to be tracking with the higher-priced international Brent index ($109.01 on Tuesday). Instead, it appears to be tracking more closely to the less-valuable West Texas Intermediate prices ($98.20 a barrel on Tuesday), according to RBN.

The article speculates that an oversupply of sour-crude oil at the Gulf Coast is pulling down the price of imported oil on the West Coast, where Alaska's oil is refined.

Once that's corrected, Alaska North Slope prices should again move closer to the Brent.

But the relief may be temporary. The article notes that shipments to the West Coast from the shale-oil fields in North Dakota have not yet been substantial enough to force down the price of Alaska North Slope crude.

But that will change.

"In the longer term, however, ANS prices will come under greater pressure from domestic crude grades as they begin to be delivered in greater quantities to West Cost refineries by the end of 2014," RBN Energy said.

Contact Alex DeMarban at alex(at)alaskadispatch.com