Falling oil prices to limit budget options

Commissioner Galvin: State will be cautious

Posted: Saturday, January 17, 2009

Plunging oil prices are likely to give Alaska less money to spend in the next year and have Gov. Sarah Palin looking at a bare-bones state budget for next year.

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Photo Courtesy Of Kevin Abbott
Photo Courtesy Of Kevin Abbott

In early December the Department of Revenue presented its Fall 2008 Revenue Sources Book, the state's official estimate of how much revenue it will have in the upcoming fiscal year, and the news wasn't good.

Department of Revenue Commissioner Pat Galvin said the state will be cautious with budgeting, especially given the extreme fluctuations in oil prices over the last several months.

"Oil prices have experienced unprecedented price volatility," Galvin said.

Prices for Alaska North Slope crude have recently fallen more than $100 a barrel since they peaked on July 3, while at the same time production on Alaska's mature oil fields continues to decline.

This year's budget though, flush with new oil revenue, had billions in extra spending above basic operating costs. That most notably included a $1,200 boost to each Alaskan's permanent fund dividend check.

Despite the subsequent decline, Galvin said those checks weren't a mistake.

"The people of the state were definitely in need," he said.

This fall's estimated price for a barrel of oil next fiscal year, the number on which the state bases its financial planning, is $74.41. That's below the $83 per barrel on which this year's budget was developed, but well above current prices, which dropped to $35.61 in early December.

Under the Department of Revenue's fall revenue forecast, released at a press conference in Juneau, Galvin predicted the state would bring in $5.28 billion next year, down from this year's estimated $6.75 billion.

Galvin said Gov. Sarah Palin's budget proposal to the Legislature is very conservative and assumes oil prices may be even lower than the state's official forecast.

"It would be responsible to come in with a budget that is as lean as she can make it at this point in time," he said.

We're going to have to "live within our means," Palin told reporters prior to the governor's annual open house, but she wasn't clear whether that philosophy would allow dipping into the state's budget reserve funds, set aside for that purpose during boom times.

Galvin said deficit spending was possible, and may even be necessary to keep Alaska's economy going.

"The state needs to be careful how we manage our own budget to not create any additional pressure on the overall economy," he said.

While the federal government can use deficit spending to boost the economy in tough times, most states can't do that since they are required by their constitutions to balance their budgets. Alaska, however, has been setting aside billions of dollars in budget reserve funds for that very purpose.

Galvin said the department is likely to provide additional interim budget estimates before the Spring Revenue Forecast is officially released at the end of the legislative session.

The spot market prices for oil are well below what the department is predicting for next year, Galvin acknowledged, but noted that the new fiscal year for which they were budgeting didn't begin for another seven months.

"Today's price will likely bear little resemblance to the price 12 months from now," he said.

Galvin said his department's revenue assumptions are based on a relatively quick end to the recession.

"If that does not occur, we will have to adjust our forecast accordingly," he said.

Oil prices are difficult to accurately predict, he said.

"There's nothing more humbling than being a forecaster of future oil prices," he said.

Under the department's price forecast released in December, the state will likely have to dip into savings just to pay this year's budget. Last year the state brought in an all-time record $10.79 billion and has ample reserves to cover shortfalls.

One bit of good news from Galvin: While production from Alaska's mature oil fields is declining, the department predicted that decline will be slowed in the next few years by new fields coming on line.

Two independent companies will start producing oil during that time, including Italian-owned ENI at Nikaitchuq and Pioneer Natural Resources at its Oooguruk field.



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