(Photo by Lindsay Ohlert/Creative Commons)
Oil prices were up for the third straight week last week.
In Alaska, North Slope crude rose to nearly $50 a barrel by the end of the week.
That’s much higher than the $40-a-barrel price the state based this year’s budget on. But, the price isn’t nearly high enough to fill the state’s massive $3.2 billion budget deficit.
Ken Alper, director of the state’s tax division, said each dollar increase in the price of oil works out to about $25-$30 million in revenue for the state. And while that’s helpful, it’s not going to balance the budget.
“I don’t think we’re expecting it to move very much and once again we’re anticipating over a $3 billion dollar deficit so a few hundred extra million is certainly helpful but it still means a large shortfall for the current year,” Alper said.
Alper said the rebound in prices is good for oil companies.
“The big difference that happens around $46 a barrel is, that is, per our estimates, around the break even point for the major producers on the North Slope,” he said.
That break even point is a big deal for the state. If oil stays at that price, the state is guaranteed a four percent tax on production. Any lower and the companies can claim credits that reduce the state’s tax revenue.
But the price of oil is still half of the $102-per-barrel needed to balance the state’s budget this year.
Alper said that it is technically possible oil prices could get back up to that level, but very unlikely.
“It’s a small likelihood. There’s certainly a possibility. We can’t discount it. But if I had to put a number out there, I’d put it in the less than 5% category,” he said.
There are several factors affecting the price of oil. A big one is that global inventories of crude oil are high and the market is oversupplied. Analysts say that isn’t likely to change soon.
Members of the Organization of Petroleum Exporting Countries, or OPEC, are set to meet with other producers in September to discuss freezing production. That fueled speculation that drove prices up last week.
Esa Ramasamy, is an analyst for S&P Global Platts. He said OPEC signalling that it would discuss capping production could drive prices up in the short term, but other factors have longer lasting impacts on the market, like the forecast.
“This year, they believe the winter is going to be much cooler than what it was last year,” he said.
Hurricane season can also drive oil prices up as storms hit the Gulf of Mexico and halt production at rigs there. But, Ramasay said there are other factors that could pull prices down. Of those, one of the most critical is investment.
As oil prices cratered, companies stopped investing. Ramasamy says there hasn’t been any measurable investment in the last two years.
In Alaska, low prices have caused the state to dip into its $8 billion constitutional budget reserve to close the deficit this year.
And, while more revenue from the bump in oil prices will cause the state to draw less on its savings, the problem is far from resolved.
By Monday, prices had fallen by 3 percent, making it seem even less likely that they’ll rebound to budget-balancing highs anytime soon.
