Providing coverage of Alaska and northern Canada's oil and gas industry
December 2008

Vol. 13, No. 52 Week of December 28, 2008

Alaska bullish, skeptical on prices

Alaska is forecasting higher prices than other oil states, but forecasters admit an adjustment could be required early next year

Eric Lidji

Petroleum News

Across the country, states with oil interests are scrambling to adjust revenue forecasts in the hope of staving off budget shortfalls. Alaska is adjusting too, but so far the state is much more bullish about short-term oil prices than other oil producing states.

In a forecast released Dec. 9, the state projected oil prices would average $74.41 a barrel over fiscal year 2010, which starts July 1, 2009. But as of Dec. 22, Alaska North Slope crude oil was only trading at $25.81 a barrel, the lowest price since May 2003.

While Alaska is far more dependent on oil revenues than any other state in the country, it isn’t the only state to use oil price forecasting in order to estimate revenues each year.

In response to volatile prices, Gov. John Hoeven of North Dakota proposed two budget estimates this year, one with oil prices around $70 a barrel and another with oil prices staying below $50 a barrel. Under the lower forecast, North Dakota will bring in about $400 million less over the two-year budget cycle than under the higher forecast.

Over the past few years, oil companies have flooded into North Dakota to develop the massive Bakken formation. North Dakota collects a 5 percent gross tax on oil production, and maintains a “permanent oil trust fund” similar to the Alaska Permanent Fund.

State economists in Louisiana originally predicted oil prices would average $84.23 a barrel this fiscal year, which runs through June 30. But after a mid-year budget review showed the state facing a huge shortfall, they lowered the forecast to $68.16 a barrel.

Now, for the 2010 fiscal year starting July 1, Louisiana is projecting an average oil price of $56.74, about 24 percent lower than the $74.41 being forecasted in Alaska.

Texas, the leading oil producing state, isn’t releasing its upcoming revenue estimate until Jan. 12. Texas is one of the few states in the country still holding onto hope of a budget surplus, and the state has been hesitant to issue any details before the official release.

The state forecasts oil prices by weighing in house estimates against global trends.

This past January, Texas projected an average price of $68.34 a barrel in fiscal year 2009 and $69.21 a barrel over fiscal year 2010. The Texas fiscal year starts on Sept. 1.

The U.S. Energy Information Administration expects prices will only increase to around $51 a barrel through the end of 2009, but will then rise to around $75 a barrel in 2010.

Volatility means adjustments

Given the drop in prices, some see the Alaska fiscal year 2010 forecast as too optimistic.

Citing oil prices forecasts from the federal government and the financial sector that all fall well below $74.41 per barrel, Rep. Mike Hawker, R-Anchorage, recently asked Gov. Sarah Palin to re-evaluate the state revenue projections for the upcoming fiscal year.

If the state can’t “convince us those numbers are correct” by providing a “consensus of economic opinion,” then the proposed budget will be “dead on arrival” when the next legislative session begins on Jan. 20, Hawker told Petroleum News on Dec. 23.

Typically, budget debates revolve around how to spend money, not how much money is available to spend. The Legislature does not have its own professional economic staff.

The Palin administration admits $74.41 a barrel most likely won’t be the exact price of oil in the coming year, but stands by its estimate considering the information currently available to forecasters, spokesman Bill McAllister told Petroleum News on Dec. 23.

“It will turn out to be wrong,” McAllister said. “We just don’t know how wrong and in which direction.”

The state crafted its most recent price forecast, including the $74.41 figure, in October and November, a stretch when oil prices started at $96 a barrel and ended at $50 a barrel.

Now, the administration is considering a rare interim revenue forecast to bridge the gap between the usual fall and spring reports. Considering the volatility in energy markets, McAllister said it makes more sense to wait a few months to make any budget revisions.

“There is no point in doing another revenue forecast now,” McAllister said.

Extreme volatility in commodities markets has troubled state forecasters all year.

In its revenue forecast released in January, the state projected oil prices would average $66.32 a barrel over the current fiscal year, which began July 1. By April, with prices rising, economists raised the estimate to $83.04 a barrel. But in December, they predicted oil prices around $62 a barrel over the rest of the fiscal year, which runs through June.

Buoyed by record prices and recent tax increases oil revenue accounted for nearly 93 percent of all the unrestricted revenues collected by the state last year. The state expects that percentage to hover at 90 percent this year and fall to around 88 percent next year.

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