Even an ‘optimistic’ oil forecast shows Alaska running out of savings in 2021

Even under an “optimistic” forecast, the state of Alaska will run out of available savings by June next year, state legislators learned Wednesday.

Oil prices have plunged amid a worldwide pandemic that has vaporized demand for petroleum products. Crude oil is the second-largest basis of the state budget, behind only investment earnings.

On Wednesday, a barrel of Alaska North Slope Crude was worth $10.08, and a price of $79 per barrel is needed to balance the budget at current production levels.

In a meeting of the House Finance Committee, the Legislature’s leading budget official said the state revenue forecast for the next fiscal year is $815 million lower this spring than it was last fall.

In the following years, revenue will be down by between $650 million and $750 million per year.

But Pat Pitney, director of the nonpartisan Legislative Finance Division, said those figures, from the state Department of Revenue, “could be very optimistic” because they assume oil producers will keep production at current levels.

With producers losing money on each barrel they pump, that isn’t likely. Rep. Ben Carpenter, R-Nikiski, said he was told by an unnamed oil-industry official “that we are days away from a slowdown in production,” and “if my sources are correct, we are going to see the pipeline pretty close to shut down.”

That claim could not be independently verified Wednesday. Sean Clifton, a specialist with the state Division of Oil and Gas, said, “Though storage levels may require moderate, temporary decreases in production volumes, a complete shut-down of the pipeline and upstream production is not a serious probability. Alaska oil still has a strong market for deliveries on the West Coast.”

Production declines, even temporary, will make next year’s state budget process more contentious.

The state has used two budget reserve accounts to cover deficits since 2013, but both will be effectively empty early next year.

To pay for the state budget in 2022, lawmakers will either need to raise taxes, cut spending or cover the deficit by spending additional money from the Alaska Permanent Fund.

Under a scenario that includes no oil production declines, a flat budget, and no additional wildfire or coronavirus spending, Pitney said that lawmakers next year would face a $300 million deficit with no 2021 Permanent Fund dividend, a $1 billion deficit with a $1,000 Permanent Fund dividend, and a $2.4 billion deficit with a dividend paid using the traditional formula in state law.

[Because of a high volume of comments requiring moderation, we are temporarily disabling comments on many of our articles so editors can focus on the coronavirus crisis and other coverage. We invite you to write a letter to the editor or reach out directly if you’d like to communicate with us about a particular article. Thanks.]