Lower-than-expected oil production from the North Slope and lower global oil prices have opened a state budget gap of $180 million to $200 million, analysts and state officials estimate.
Because the state budget relies upon average production and prices through an entire year, the gap may diminish, but current forecasts don’t indicate any upturn in prices. Without one, the state will likely be forced to turn to the Constitutional Budget Reserve to cover the gap.
The downturn is also expected to cause the state to reduce its prediction for future revenue later this fall, an act that may encourage additional budget cuts or a push for new taxes in next year’s legislative session.
“The sky isn’t quite falling yet, but we’re in a place where things are looking somewhat concerning,” said Ed King, a former state economist who now owns and operates his own firm.
This spring, the Alaska Department of Revenue forecast that the state would produce 541,100 barrels of oil per day at $66 per barrel between July 1, 2019 and June 30, 2020. That was expected to generate $1.75 billion for the state treasury, not as much as the Alaska Permanent Fund Corporation, but still the No. 2 source of revenue for state government.
Instead, according to Department of Revenue figures through Thursday, production is 15% below that estimate and prices have averaged 4% below the estimate.
“For FY20, we’re probably going to be down a couple hundred million from the spring forecast because of the price and production numbers,” said Department of Revenue Commissioner Bruce Tangeman, referring to Fiscal Year 2020, the current fiscal year.
Sen. Natasha von Imhof, R-Anchorage and co-chair of the Senate Finance Committee said that according to her figures, the difference between planned and actual figures is “about an $180 to $200 million reduction.”
Production is typically lower in summer months than winter months because maintenance shutdowns typically take place in summer, but Rowena Gunn, an Alaska analyst for the energy and natural resources firm Wood MacKenzie, said ConocoPhillips has also produced less than expected from a development known as Greater Mooses Tooth No. 1.
“That production is obviously a bit lower,” she said.
King agreed with that assessment and added that production at some of the North Slope’s older fields has also been slightly under what had been “a little aggressive” forecast by the state.
Independent economist Brad Keithley said the price decline is even more important than the production decline because while production has a chance to rebound during the peak winter months, forecasts indicate prices will remain low.
That’s “hugely important” for the state budget, he said, because oil prices are “where the deficit either rises or falls.”
The Energy Information Administration is projecting oil prices in 2020 will average between $54 and $60 per barrel, depending upon the source of the oil. Oil-trading markets, such as NYMEX (the New York Mercantile Exchange) also forecast prices below $60 per barrel for the forseeable future.
“There’s just not a good scenario out there that tells you price is going to significantly harden from current levels,” Keithley said.
Earlier this year, legislators voted to use the Constitutional Budget Reserve, the state’s main savings account, to balance the budget in the event of a shortfall in oil prices. With a balance of about $2 billion, the reserve contains enough money to make ends meet even if prices were to plunge further.
But in the coming weeks, Tangeman and the Department of Revenue will release a revised revenue forecast. Tangeman declined to say what that forecast will show, but Keithley and others believe it will indicate significantly less oil revenue.
Gov. Mike Dunleavy has already said he expects to show additional budget cuts when he unveils his draft for next year’s state budget on Dec. 15. The governor has said he intends to balance the state budget without new taxes, spending from savings or reducing the Alaska Permanent Fund dividend. If the governor holds to that strategy, reduced oil revenue would mean greater budget cuts.
Keithley, who has long supported the reinstatement of an income tax, said the recall effort against the governor indicates a dwindling appetite among Alaskans for additional cuts.
In his view, “the question is how we’re going to tax.”
Correction: An earlier version of this story misspelled the last name of economist Brad Keithley.