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Revenue boosts average projected oil price to $22 a barrel
Kristen Nelson, PNA editor-in-chief
Department of Revenue Commissioner Wilson Condon says the most important change in the department’s fall revenue forecast is the increase in the long-term forecast price for Alaska North Slope crude delivered to the West Coast to $22 a barrel. The new price is some $5 a barrel above the previous long-term average, $16 to $17 a barrel, which represented what the state experienced from 1986 to 1999, Condon said.
The $22 a barrel also lines up, he said Nov. 26 as the fall forecast was released, with the bottom of the Organization of Petroleum Exporting Countries’ target price band of $22 to $28 a barrel. The department believes, Condon said, “that OPEC will continue to be successful at managing the market and holding prices at that level.”
The ANS delivered price has averaged $25 a barrel for the last three years, he said, and has averaged $22 a barrel over the last four years.
OPEC managing market Chuck Logsdon, the state’s chief petroleum economist, said the price of crude oil has remained “remarkably high” over the last four years compared to the average of $16 to $17.50. The department has discussed whether the average should be changed, he said, and there is now enough information for some statistical analysis. “Quantitatively you can demonstrate that there is evidence of a structural change in the oil market that has occurred,” Logsdon said.
The reason for this change is that OPEC has been very successful in managing the market. In 1999, he said, there was an entire year when oil prices averaged $12 a barrel, the Legislature had to take over a billion dollars out of the Constitutional Budget Reserve and the oil industry began using very low hurdle rates to evaluate investments.
In a reaction to the low prices, OPEC took some oil out of the market and also got the cooperation of non-OPEC nations to reduce production.
“They have made, since 1999, seven changes in quotas and it’s all been in the downward direction,” Logsdon said. Today, the quota is 5 million barrels a day less than it was in 1999, although OPEC production is only down some 2.3 million barrels a day.
Because OPEC can’t behave as a perfect cartel — i.e. members cheat on production quotas — and given some of the statistical information, Logsdon said the state “opted to choose as a long-run price the low range of the OPEC target which is $22 to $28.”
He said the OPEC basket price, over time, is quite close to the price of ANS crude delivered to the West Coast, “so it’s a very nice target variable for OPEC, but it’s also very nice for us because we can link up ANS with it.”
Logsdon said the forecast also contains two alternate scenarios: $17.70, the average price from 1986 through the current period; and a high-price scenario of $25, the mid-point of the OPEC range.
Price forecast up, production forecast down Condon said the department has raised the price forecast for each of the next fiscal years above last spring’s forecast. For the current fiscal year, FY 03, the forecast last spring was $20.50 a barrel, and the department is now forecasting $25.94 a barrel. For FY 04, the spring forecast was $19.50 a barrel, and the department is now forecasting $23.25. The spring revenue forecast for FY 05 was $19.50 and the new forecast is $22 a barrel.
Unlike the price forecast, the production forecast is down from spring, Condon said. “Over the next three years our production forecast instead of being just a little over a million barrels a day, is just a little bit under a million barrels a day.” The average of decline is about 60,000 barrels a day, he said.
In the spring revenue forecast the department said its “short-term ANS production forecast has been reduced in anticipation of a slower than expected pace of heavy oil development, a slower pace of developing new Greater Kuparuk Area opportunities, delays in offshore Beaufort Sea developments, and uncertainty in facility expansion plans at the Colville River Unit.”
Production is expected to get back above 1 million barrels a day in fiscal year 2008.
The combination of changes in the forecast also changes the projection of when the Constitutional Budget Reserve Fund will run out of money, Condon said: that estimate now stands at June 2005.
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