Revenue department forecasts jump in oil prices, drop in production

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A crowd walks across a map of Alaska at the Alaska State Library, Archives & Museum on Dec. 19, 2016, in Juneau. The state released its revenue sources book, which will help lawmakers and Gov. Bill Walker work out a budget for the upcoming year.  (Photo by Rashah McChesney/Alaska’s Energy Desk)

When it comes to the state’s bottom line, the tax division’s revenue sources book predicts a patchwork of good and bad news for the state.

The good? Oil prices are forecast to go up.

The bad? The money coming in from oil revenue is nowhere near enough to close the state’s budget gap and production on the North Slope is forecast to go down.

Have a lawmaker, the governor or maybe someone in Alaska’s oil and gas industry on your holiday gift list this year? They’d probably love a good crystal ball: one that might give them a glimpse of the future price of oil, or how much the state is going to produce next year, and maybe a look at the end of the legislative session to find out what’s going to happen with all of those tax proposals floating around.

Unfortunately, no such soothsayer exists. And they’ll probably have to rely on the state’s Department of Revenue.

Earlier this week, analysts released their semi-annual revenue sources book. It’s a snapshot of the state’s financial health.  It has current and historical income information. And, for the analyst on your list, it also has predictions for the price of oil for the next few years: How much the state is going to produce, what kind of money the state expects to have available to spend, and this year a whole chapter on the potential impacts of an income or sales tax.

And, while it’s no crystal ball. It can help with the economic forecast.

First, the good news: Oil prices are predicted to go up. During this fiscal year, they’ll average $46.81 a barrel. And that’s expected to go up to $54 per barrel next year.

State tax division director Ken Alper said that price jump is going to help the state.

“A good rule of thumb for Alaska at the range of prices we’re at right now is every dollar in the price of oil is worth about $30 million,” he said. 

Tax Director Ken Alper
Tax Director Ken Alper with the Department of Revenue speaking on oil tax credits to state lawmakers this February. Alper would like to spend less time talking about oil this legislative session. (Photo by Skip Gray/360 North)

So, a $10 jump in the price of oil means that, over the course of the next year, the state should get about $300 million in additional revenue.  

But that’s not nearly enough to cover the state’s $3 billion budget deficit.

“It’s substantial. No one should ever scoff at $300 million,” he said. “But that’s not balancing the budget.”

One other consequence of that slight jump in oil prices? The state’s going from a price that’s below the oil industry’s break-even point, to above it. That price is around $45 a barrel.

That break-even point is very important for the state.  When oil prices fall below it, the major producers on the North Slope start losing money.  And they can turn those operating losses into credits that can be used to offset taxes they owe to the state.

They’re still required to pay a minimum tax. But, then if it carries into the next year, the companies are able to use those credits to offset even that minimum tax.

“So we were seeing production tax revenues approaching zero for the next several years because of the very low prices we were seeing now,” Alper said. 

So, as oil prices inch upward, the state’s tax revenue picture starts to look at little better.

“That phenomenon falls off a little bit, and we now are starting to see a couple hundred million dollars in production tax revenues in the near future. Not the billions that we had in the past when prices were higher, but at least not zero,” he said.

Now, the bad news. There are still significant challenges ahead for the state.

Oil production is forecast to go down.  Prices aren’t forecast to get above $88 in the next decade.

And, the legislature is gearing up for a fight over oil tax credits, broad-based taxes and just how to solve the state’s budget crisis.

And no amount of prognosticating can tell how policymakers will resolve those arguments.  

Rashah McChesney

Daily News Editor

I help the newsroom establish daily news priorities and do hands-on editing to ensure a steady stream of breaking and enterprise news for a local and regional audience.

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