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The Concerned: Why Alaska shouldn't panic about world oil prices

  • Author: Scott Woodham
  • Updated: September 27, 2016
  • Published July 7, 2012

TO: World crude oil prices

SBJT: Half the battle

Dear Price of Crude,

As you may know, there was a brief drop across the board recently, causing some jitters around the world, particularly in Alaska. For the first time in quite a while, the price of Alaska's oil dropped into the low $90s per barrel, then rebounded. And Alaskans in and out of government started to worry.

'But wait,' you might be thinking, 'why should Alaska care so much about where market love takes me? I'm just rambling on, man, digging this wild journey.'

Most states, you probably know, aren't like individual investors who pile all their money into, say, orange juice and start obsessively crossing and uncrossing their fingers whenever Florida weather news pops up. But Alaska's different.

In most other U.S. states, low oil price is good news. Refined fuel prices tend to drop along with oil prices. And with Alaska paying a statewide average of more than $4 per gallon for gasoline, and many communities dependent on diesel or heating oil, lower crude prices come with slight relief in some places. That relief is often short-lived, though. If you drop too far, the very earth Alaska stands on begins to give way.

Alaska is doubly addicted to oil. Essentially all of its economic machinery (planes, trains, trucks, households, places of businesses, and so on) runs on petroleum, and more than 80 percent of its state budgets are paid for by revenue derived directly from oil. So when you kicked off Fiscal Year 2013 on a downslope, fine neck-hairs started rising.

Officials say the price of Alaska's crude needs to end this fiscal year at or above a yearly average of $104 per barrel. The fiscal year only began July 1, so there's plenty of time to make up for the bummer start. But still, starting off $17 below the state's average break-even mark is a tough beginning. If you stay low, there's a chance the state will have to do some last-minute budget cutting or start dipping into surpluses the state has accumulated despite rising costs and a growing population.

We're concerned about you, but always optimistic – even though we have no concrete reason for it. Your fluctuations over several-month increments frankly baffle us. Like most commodity markets, you're not only determined by supply and demand. You're also governed by emotions. In the short term, individuals' impressions of your direction, or their fears about it, can have a powerful effect on your movements. And because global events turn on a dime sometimes, predictions of your movement beyond a year or two are tough to make with much certainty.

We've always loved to picture oil market analysts sitting in cubicle farms, each staring intently at a small crystal ball, their auguries for the next year or 20 averaged out into a form of useful commonsense. Unfortunately, there's no way to predict very far out an offshore oil workers' strike in Norway, a Libyan uprising, or tensions with Iran. And who knows how much actual supply has been lost to thieves. There's also no way to predict how much longer economic doldrums will continue suppressing oil demand around the world.

Alaska tries valiantly to predict your movements as a way to guide budget decisions. Generally, the state tries not to make wild assumptions about the value of its oil or future rate of production. Predicting the economy is like predicting the weather, as the saying goes. But you're the main variable; production from the North Slope is known to be decreasing about 6 percent each year. And that decline means the average price must be higher to make up the difference and keep pace with rising costs of state government, and of course, legislative wish-lists.

Even though we can't imagine you have much time to care about our little ol' Alaska's situation, we were wondering if you could see it in your heart to help out. Since asking you to stop swinging around all over the place would be like asking a cottonwood tree to stop casting off fluff, we're not going to ask you to stand pat for the next year on North Slope crude at, say, $106 per barrel. Birds gotta fly; fish gotta swim; and oil on the spot market's gotta go for the best price.

No no, we have faith in the state's revenue projections; they're the best guesses we have. Even if this week the investor services firm Moody's lost confidence in high oil prices, and the energy sector in general, and the U.S. is sitting on more oil inventory than it has since 1990, we're still betting on the dice the state has rolled.

We're just wondering if you could try to make the year more interesting. It would be completely awesome if you closed a single day of trading with Alaska North Slope crude selling above $380 per barrel. Just once. But that would take some sort of bizarre error, like a group of scientists reading upside-down charts suddenly finding that Alaska's oil cures certain kinds of cancer.

Instead, try bottoming out at $70 per barrel for a week, then shooting up to $140 for a month. Wouldn't that be fun? Do it a few times if you want, just not for too long. Remember, a yearly average means you still have plenty of time to yank Alaska's chain.

Shine on you crazy diamond,

The Concerned

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