Sudden oil price slide should alarm slumbering Alaska politicians

Let’s travel down memory lane for a moment.

Way back to Oct. 24, 2018.

On that day, the Fairbanks Daily News-Miner ran a column by Anchorage Sen. Anna MacKinnon in which she said the rebound in oil prices had brightened the outlook for Alaska and proven once more that the Senate was right in rejecting all taxes.

“Today, our situation looks a little better,” MacKinnon said three weeks ago, in what appeared to be an audition for a job with the Dunleavy administration.

“Oil prices have averaged over $78 per barrel, well above the official forecast of $63. If prices hold, the state should finish the year with a surplus. Unlike what Mark Begich says, now is not the time to tax Alaskans.”

Today, our situation looks a little worse.

Alaska oil hit $85 a barrel on Oct. 3, but the price is now below $70 per barrel. President Donald Trump wants to see it keep falling: "Hopefully, Saudi Arabia and OPEC will not be cutting oil production. Oil prices should be much lower based on supply!" he wrote on Twitter.

Bloomberg reports that the rise in oil prices earlier this year was in anticipation of what the U.S. sanctions against Iran, aimed at its oil exports, would mean to international markets. The Trump administration has given waivers to some countries, blunting the impact of the sanctions.

A $1 change in the price of oil over a year means about $80 million more or less in state income when oil is in the vicinity of $70 per barrel. The dream of a temporary surplus is hard to take to the bank.

We’ve had many reminders over the years that it is foolish to look at the price of oil at any moment and conclude that it will hold for a week, a month or a year.

When oil prices rise, we spend more money and say it proves we don’t need taxes. When oil prices drop, we panic and say it proves we don’t need taxes. We need “right-sized government,” never settling on the dimensions.

The final Revenue Sources Book from the Walker administration, which is expected to be released shortly, will probably predict a higher oil price than the version released last spring. It may show a surplus or a small deficit based on the latest oil price guess.

The latest forecast from the U.S. Energy Information Administration is for a price of $72 in 2019, which would generate several hundred million more for the state treasury than the last state forecast. It might happen.

The budget for this fiscal year balances with $1.7 billion from Permanent Fund earnings, which included a $1,600 Permanent Fund Dividend, and oil priced at $72 per barrel. That doesn’t include any supplemental appropriations, which are likely.

With oil at $70, the deficit would be about $150 million. Meanwhile, the proposal to pay a higher dividend by Gov.-elect Mike Dunleavy would push that deficit up by more than $1 billion.

(This doesn’t include the Dunleavy proposal to take $2.4 billion from the Permanent Fund to make up for the lower dividends approved by the governor and Legislature for the last three years. That would push the deficit to about $3.5 billion with oil at $70, while future earnings of the fund would be cut by billions over time.)

What we need to remember is that oil prices never hold and predictions are almost always wrong. We need to prepare for high prices, low prices and everything in between. The only pain-free plan is one in which oil prices never fall, a dangerous fantasy.

Dermot Cole1 Comment