Preliminary revenue forecast out, but per barrel price headed lower

  • A price estimate for North Slope oil produced in October called for $75 per barrel for the rest of the fiscal year. Recent drops have officials calling for that number to be revised downward before the budget is released Dec. 15. (Photo/Michael Dinneen/For the Journal)

Amid a transition of power at the highest levels of state government and ongoing earthquake rebuilding and recovery in Southcentral, Department of Revenue officials released an early version of the state’s annual Fall Revenue Forecast on Dec. 3 with a major “subject to change” disclaimer.

The Preliminary Fall 2018 Revenue Forecast projects the State of Alaska will collect more than $6.2 billion of unrestricted revenue available for appropriation in the current 2019 fiscal year, which would lead to the state’s first balanced budget since 2012, outgoing Gov. Bill Walker said in a speech to the Anchorage Chamber of Commerce Nov. 26.

Slightly more than $3 billion of that would be petroleum-derived tax and royalty revenue, while another nearly $500 million would come from non-petroleum sources; the remaining $2.7 billion would be drawn from the Earnings Reserve Account of the Permanent Fund based on a 5.25 percent of market value, or POMV, calculation.

However, the big caveat in those numbers is an assumption that Alaska North Slope crude oil will hold an average price of $76 per barrel for the remaining roughly seven months of fiscal 2019. That figure was arrived at late October, according to a Revenue Department release, when daily Alaska oil prices were hovering between $75 and $79 per barrel.

The department is delaying slightly the release of the 2018 Revenue Sources Book to allow the oil price forecast to be reviewed and possibly revised. The final book will still be published ahead of the mandated Dec. 15 deadline of Gov. Mike Dunleavy’s first proposed budget, according to a department release.

As of Nov. 29, Alaska crude sold for $60.46 cents per barrel, according to the state Tax Division.

The forecast anticipates an average Alaska oil price of $75 per barrel for fiscal year 2020, which starts July 1 and prices slowly climbing to average $84 per barrel by 2027.

“Once again, Alaska is experiencing unexpected oil price volatility. As has been our practice for the past 15 years, through the month of October, the department worked with staff from Revenue, Natural Resources, Labor, the University of Alaska, (the office of Management and Budget), and Legislative Finance, as well as private economics firms and financial analysts to develop an oil price forecast,” Revenue Commissioner Sheldon Fisher said in a formal statement. “During November, however, the oil markets have experienced the largest monthly price decline, in percentage terms, in a decade.”

Fisher continued to say that oil markets currently appear to be oversupplied as U.S. oil sanctions on Iran that took effect last month did not slow the supply of oil from the major producing country as expected. That resulted in increased Saudi production — intended to only offset production losses from Iran — oversupplying global oil markets in the short term and leading to the dip in prices, according to Fisher and other analysts.

President Donald Trump has said he wants Saudi Arabia to continue ramped-up production to keep oil prices low, which generally benefits U.S. consumers. The route the Saudis will take is unclear.

Alaska economist Ed King, who previously worked as an economic advisor in Walker’s administration and now manages private firm King Economics, suggested incoming Revenue Commissioner Bruce Tangeman and his team should look at reverting back to prior predictions when adjusting the state’s official oil price forecast for the final 2018 Revenue Sources Book that will be published later this month.

“It’s probably good to assume that the $60-$65 range is a better number to budget on and if we beat that number, then great, and if we don’t then we’ll have to adjust accordingly,” King said.

The Spring 2018 Revenue Forecast, which is an annual update during the legislative session to the fall Revenue Sources Book, anticipated $63 per barrel oil for fiscal 2019 with oil prices expected “to stabilize in the low $60s in real terms,” Fisher wrote to Walker in a letter accompanying the spring forecast.

At the time, administration officials said $63 per barrel oil would leave the state with roughly a $700 million budget deficit for the 2019.

King participated in Revenue’s October oil price forecasting session and also noted how much the oil market landscape has changed since then.

“That’s one of the challenges with the annual forecast rather than a continuously updated one. That number is probably outdated and probably needs to be revised before the Legislature’s budget is based on it,” he added.

Elwood Brehmer can be reached at [email protected].

12/05/2018 - 11:53am