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Oil prices expected to drop state revenues

Posted: Monday, April 30, 2001

Lower oil prices are expected to reduce state revenues next year, requiring a draw of $622.2 million on the state Constitutional Budget Reserve for the fiscal year 2002, the budget year beginning July 1, Revenue Commissioner Wilson Condon said April 11.

In the Department of Revenue's spring oil revenue forecast, Condon said state oil revenue forecasters now think prices for North Slope crude oil will average $21 per barrel from 2002 to 2004, down from about $28 per barrel currently.

State unrestricted revenues are now expected to be $2.288 billion in the current fiscal year and decline to $1.777 billion next year, mainly because revenues from oil royalties and taxes will be lower.

High oil prices over the last year eliminated the need to tap the budget reserve, which is the state's main savings account. In fact, the current year is expected to have a $1.5 million surplus when it ends June 30, Condon said.

The department's spring forecast projects Alaska North Slope oil prices to average $27.61 per barrel for the current fiscal year.

"It's been a bouncing year for oil prices. We've seen ANS prices range from over $34 to just above $20 per barrel," Condon said. "This has not been a year for market stability."

On the brighter side, oil production is expected to increase next year with new fields beginning production on the North Slope. Production dipped below 1 million barrels per day through much of the current fiscal year, but should average just over a million barrels a day through next year, Condon said.

Falling stock prices will hurt investment performance of the Alaska Permanent Fund this year, resulting in a slightly smaller dividend. The fund's unrealized capital gains, the stocks it holds that gained value in what had been a bull market, have been hit. They are now down about $2 billion in value, Condon said.

The dividend will be less affected because it is based on a five-year average of permanent fund earnings, however.

Lower oil prices also mean a larger budget deficit for the following year, Condon warned. Assuming state general fund spending remains at about $2.4 billion over the next two years, the deficit will climb to $895.1 million in fiscal 2003.

If those kind of deficits continue, the drawdown on the Constitutional Budget Reserve would deplete it by July 2005, Condon said. That's six months earlier than the department predicted in its last revenue forecast in December.

Tim Bradner is a reporter for the Alaska Journal of Commerce.



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