State applies drastic cuts to oil price forecast, reflecting world market

The Department of Revenue predicts that oil prices could be $65 per barrel for the rest of the fiscal year, down by more than $45 from the market price for Alaska oil five months ago.

The final three months of the Parnell administration coincided with a dizzying collapse in world oil prices, creating a monumental financial challenge for the Walker administration, which inherited a budget deficit that could total $3.5 billion this fiscal year.

The deficit could be higher if oil prices slide much below $70, while it could shrink if the market rebounds. At current prices, the oil companies are paying the 4 percent minimum gross tax, which comes into play because about $1 billion in tax credits would otherwise reduce revenue even more. A decade ago, the state rejected the 7 percent gross tax under the Economic Limit Factor or ELF system because it was deemed to be too low.

Marcia Davis, the interim leader of the revenue department, said the Walker administration wants Alaskans to get the full revenue picture as soon as possible. That includes scaling back the official state predictions on what prices the state should prepare for this year and next.

The department sliced the revenue prediction to $65 for the rest of this fiscal year and $66 for the fiscal year that begins next summer. If the lower numbers prove correct, it will mean billions in reduced revenue, as the older predictions all exceeded $100 per barrel.

"Having a more realistic assessment of revenue to fund state government will enable everyone to shape their expectations and make the smarter choices," Davis said.

The Walker administration released the version of the state budget prepared by the Parnell administration four days after the new governor took office but Walker said he will need some weeks to go through the documents and settle on budget priorities.

Under the spending plan approved by the Legislature last spring and signed by Parnell, the first 100 days of the Walker administration could see a deficit of about $1 billion, which will be filled from the state's ample savings accounts.

The longer-term challenge is whether the savings accounts -- which ballooned under the old tax system when oil prices shot up -- will ever be replenished. Oil production has continued to decline this year. Through the first 11 months, oil production is 4 percent below the level of the first 11 months of 2013.

It's not at all certain that oil prices will remain where they are but the increase in U.S. production and the decision by OPEC nations not to cut back on production have led to higher supply and lower demand. An international crisis of some kind could quickly turn that around but the state is not counting on that in the forecast to be published this month.

The last report from the Department of Revenue, dated April 7, said oil prices in this fiscal year would be about $105 per barrel on average. Prices began in that territory in July at the start of the fiscal year but the trend has been down since September.

While daily headlines are not a good way to determine what might happen over a period of months, the recent collapse has led many banks, oil companies, financial institutions and others in the prognostication business to expect lower prices for a while.

"We want to be as open about this as possible right out of the gate so that Alaska's citizens, the executive branch and the Legislature have as much time as possible to collaborate on how we can best navigate this oil price trough," Davis said.

Last spring, when the Legislature adjourned and Gov. Sean Parnell signed the budget, the state said that oil prices needed to be in the $117 range to balance the budget. The expectation at the time was that the deficit would be about $1.3 billion with an oil price of $105.

The state forecast in April contained a statement that has appeared in numerous Alaska revenue reports in recent years: "Forecast oil prices remain above $105 per barrel throughout our forecast period to 2022."

The working theory was that OPEC nations, led by Saudi Arabia, had settled on $100 as a benchmark of sorts. The theory has been proven wrong.

Davis said the revenue department tries not to overreact to short-term influences but "we definitely want to be as realistic as possible about the revenue impacts of these nearer-term low oil prices."

"The continued low oil price reflects a similar assessment by the marketplace. OPEC's strategy appears to be to maintain higher oil supplies and allow the lower prices to shake out the less competitive oil plays. Therefore, we want to make sure our fall revenue forecast reflects these lower oil prices at least for the rest of FY 2015 and into FY 2016."