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World oil price decline creates multibillion-dollar budget risk for Alaska

  • Author: Dermot Cole
    | Opinion
  • Updated: September 28, 2016
  • Published October 16, 2014

Oil prices have been relatively stable in the past few years, a Department of Revenue analyst said Wednesday, addressing the new state board charged with assessing Alaska's competitive position in the oil and gas world.

Stable, he said, until about a month ago, "when all hell broke loose."

Just a day earlier, Gov. Sean Parnell, while debating independent challenger Bill Walker in Fairbanks, mentioned "today's oil prices," which he said were in the $88 to $90 range. But he was quoting numbers from last week.

The price for Alaska oil dipped to $82.80 on Tuesday and $82.16 on Wednesday.

The oil price slide, triggered by more supply, less demand and a move by Saudi Arabia to compete for market share, holds major implications for Alaska if it lasts. As always, that's a big "if."

In June, the threat of a disruption on the world market by continued unrest in the Middle East sent prices climbing to $113, but in four months the world view has changed again. Oil is $30 cheaper, and the gaping hole in the Alaska budget is potentially hundreds of millions deeper.

In a pattern that has played itself out many times since the 1979 Iranian revolution — when international events created the first big oil spike in the state budget — Alaska finds itself watching as others decide its financial future. Like most other regions and nations with heavy dependence on oil, the state is subject to market and political forces beyond its control.

With the most recent decline, Alaska oil prices are close to what they were in 2010, but oil production is down by more than 100,000 barrels per day, the continuation of the long-term decline of the largest oil field ever found in North America. The production decline makes the budget picture more erratic.

In June, anxiety over potential threats to world oil supplies pushed Alaska oil to about $113 a barrel. It dropped to $100 by the end of August and slid to $93 by the end of September. The first two weeks of October brought an additional $10 decline.

Since past performance is no guarantee of future results and no one has created an oil price forecasting system that works, there are experts predicting that oil prices will continue to fall, level off or start to rise again.

In his debate Tuesday in Fairbanks, Parnell said that the new tax system he championed was a tax increase when the price goes into the $90-range, now considered a low price.

The state is likely to collect about $150 million more than it would have under the old system, he said, arguing that the SB 21 tax system is better for the state at the "low end."

But under the old or the new system, prices below $100 spell trouble for the state. If the Saudis make this a prolonged price war and keep oil between $80 and $90, the state will be piling up annual deficits of $2 billion or more, with easily accessible savings that could last five or six years. That is not counting the $50 billion Alaska Permanent Fund.

If prices stay in the $80-$90 range, the dream that oil production will increase because taxes are lower in Alaska will encounter the reality that taxes are higher at these prices and the profit potential is lower. But if prices go up, the tax level would be less than it was under the ACES system.

The old tax and the new one are both on net profits, instead of the gross value.

At $80 per barrel, the effective net tax rate on most oil production is about 15 percent under the current system, rising to 25 percent at $100 per barrel and 30 percent at $120 per barrel, the Department of Revenue says.

The effective tax rate on the gross value at $80 is about 8.6 percent, while it is about 16.7 percent when the price per barrel on the West Coast is $100, the department says.

For the moment, the reality is that oil prices are below those predicted last spring during the legislative session and last summer while Alaskans argued about oil taxes.

The Legislature adjourned and the governor signed the budget knowing it would take an annual average oil price of $117 to balance it, expecting prices below that level but above $100.

The last revenue forecast from the state in the spring predicted that oil prices would average $105 this fiscal year, which would mean a deficit of $1.3 billion, according to the Division of Legislative Finance.

The deficit would be $1.7 billion if oil prices average $100 a barrel this year, $2.1 billion if it drops to $95 a barrel and hundreds of millions higher if oil goes lower.