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High oil prices delays exhaustion of state reserve account

Posted: Thursday, April 13, 2000

JUNEAU (AP) -- Higher than normal oil prices will narrow the gap between state petroleum earnings and spending next year but will barely affect the long-term need to find another way to pay for state government, Revenue Commissioner Wilson Condon said Wednesday.

Announcing spring revenue forecasts, Condon said his department predicts North Slope crude oil will average $23.28 per barrel through June 30, almost double the $12.70 average price last year.

The increase means that the gap between petroleum earnings and spending will be $305 million this year.

Just a year ago forecasters were predicting a billion-dollar gap between spending and revenue -- not counting investment income, most of which shows up in the Permanent Fund. Those earnings have been considered untouchable by many legislators, especially after voters last year rejected a long-range financial plan that involved using earnings to pay for part of state government.

The Revenue Department predicts a gradual slide in petroleum prices to $22.76 per barrel for next year, which translates to a $413 million gap between earnings and spending.

Lawmakers make up the difference between spending and petroleum revenue by tapping the Constitutional Budget Reserve, which now contains $2.6 billion. The total includes the $416 million tax settlement just paid to the state by BP Exploration (Alaska).

But all the extra earnings from recent high oil prices have extended the reserve's life by only 10 months, Condon said, and the state still faces the need to change how government is financed.

''The picture remains the same,'' Condon said. ''The Constitutional Budget Reserve will run out of money. It is inevitable.''

The run-dry date is now predicted for November 2004, Condon said, if general fund spending remains at $2.3 billion per year.

''Despite the very high oil prices of the past year, all we gained was 10 months in the life of the budget reserve,'' Condon said. ''This makes if very clear that higher prices will not solve the problem.''

No solution to the problem is on the horizon this election year.

Sen. Jerry Mackie, R-Craig, is proposing to pay each Alaskan a $25,000 one-time dividend and use the rest of the Permanent Fund earnings to pay for state government. Several House Majority members, including Reps. Gail Phillips, R-Homer, Bill Hudson, R-Juneau, and Alan Austerman, R-Kodiak, have proposed to fill the state's budget gap with a mixture of Permanent Fund earnings and taxes on the public and industry. Neither plan is expected to win approval before the session ends.

The revenue forecast attributes recent petroleum prices to higher consumption and reduced worldwide production. Economic growth in the United States and the economic recovery in Asia resulted in world consumption growth of 1.6 percent, or 1.2 million barrels per day in 1999. At the same time, crude oil production fell 1.5 million barrels per day as the Organization of Petroleum Exporting Countries cut average output, the report concluded.

The main reason higher prices have not translated into the abundance enjoyed by Alaskans in the early 1980s is the drop in volume sent through the trans-Alaska pipeline.

Production has declined steadily since a peak of just more than 2 million barrels per day in 1988. Production is estimated to average just more than 1 million barrels per day this year and for the next five years.

A slight increase, from 10,000 to 30,000 more barrels per day, is predicted as new developments come on line. They include the Alpine, Northstar and Liberty fields and satellite fields that will offset a decline from mature fields.

The decline in production has mean using the Constitutional Budget Reserve since fiscal year 1997.

Condon noted that the petroleum earnings will not be the state's main source of income next year.

''Unrestricted oil revenue next year will be in third place among the state's revenue sources,'' Condon said.

Investment income from the Permanent Fund and the budget reserve will be the top revenue source, followed by federal aid.

A year ago the department predicted prices would increase only modestly from the $12.70 price.

Condon said there's a tendency when prices are low or high to believe a trend is developing and they'll stay there. However, the average delivered price for North Slope crude for all five-year periods since 1986 has been remarkably steady at just more than $17 per barrel, Condon said.

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On the Net:

The revenue forecast can be found on the Internet at http://www.revenue.state.ak.us/tax



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