Falling oil prices put squeeze on state budget

Nearly 90% of Alaska's budget consists of money from taxes on oil companies

Posted: Monday, November 24, 2008

FAIRBANKS - With crude oil prices continuing to fall, state officials now are scrambling to figure out how lower prices will impact Alaska in the next year and a half.

On Friday, the price for a barrel of North Slope crude oil was listed at $44.53 on the Alaska Department of Revenue's Web site. That's a drop of nearly $7 since a week ago and more than $100 a barrel from an all-time high of $147.27 on July 11.

The drop is placing Alaska in a difficult position. As much as 90 percent of Alaska's budget consists of money from taxes and fees on oil companies.

Gov. Sarah Palin is expected to release her budget for fiscal year 2010 in about three weeks. Her communications director, Bill McAllister, said it "will be as frugal as we can make it."

The governor spoke to the state resource developmental council this week and "she made it real clear she expects state government to live within its means and that there will be belt tightening of some sort," McAllister said.

Last year, Palin approved a budget worth roughly $11 billion, but that was based on an average oil price of $83 per barrel.

If the price of oil continues to fall, Rep. Jay Ramras, who was attending a retail gasoline hearing in Anchorage, said times are going to be grim.

"It's crazy," he said, summing up the state's financial situation.

Ramras said Friday he spoke with Mike Hawker, R-Anchorage, who is the incoming co-chair of the house finance committee, and Hawker told him the budget will be crafted around a price of $35 per barrel.

Legislators will have a much better idea how things are shaping up by spring, but "the knee-jerk reaction is going to be to pull back on capital projects," Ramras said.

"This is the kind of thing that shelved the Susitna hydroelectric project in the '80s," Ramras said, referring to a plan to build a dam on the Susitna River that never gained steam after the price of oil dropped.

The Legislature bankrolled about $5 billion in surplus revenue during the last session, and the state's constitutional budget reserve, which serves as a savings account of sorts, now stands at about $8 billion.

"Thank heavens we put a lot of money away last year because we're going to have to use it," Coghill said. "That's one of the reasons we put money away; we knew those prices weren't sustainable."

The price of oil would need to average $65 per barrel from now until June 30 to avoid dipping into the state's constitutional budget reserve, McAllister said.

Rep. John Coghill, R-North Pole, a 10-year veteran in the Alaska Legislature, said the fluctuating price of oil represents the "feast and famine" nature of Alaska's economy.

State economists are in the process of working on an estimate of oil revenues for the rest of this fiscal year and the next. The state will release its fall forecast for oil prices in early December to coincide with the release of the budget, said Cherie Nienhuis, the state's acting chief economist.

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