Higher oil prices could help fiscal gap a little

Projection: Budget reserves to be depleted in 2005

Posted: Tuesday, November 26, 2002

Higher oil prices and a possible war with Iraq will do some, but not much, to buffer the state's fiscal woes, state officials said today.

The state is projecting that Alaska North Slope crude oil will average $22 a barrel in future years, as talk of a war with Iraq boosts prices. The long-term average had been $17.50 a barrel.

Under that scenario, Alaska's $2.075 billion budget reserve account will be gone in June 2005, according to the state Department of Revenue's latest forecast. The higher oil prices have improved the outlook a little.

"In our spring forecast we were saying October 2004. Prices are higher so now we're saying (June) '05," Deputy Revenue Commissioner Larry Persily said today. "Well, it's eight months."

The state drew $738 million from the fund, known as the Constitutional Budget Reserve, last year and expects to pull out $747 million this year. With a $896 million draw in fiscal year 2004 and $1.029 billion pulled the year after, the account will be gone in 2005, according to the report.

The state expects North Slope crude to average $25.94 a barrel in fiscal year 2003 and $23.25 a barrel in fiscal year 2004 as prices gradually slide back to a long-term average of $22. Much of the state's general fund, which is used to pay for basic services, is supported by oil revenues.

The report assumes no increases in state spending, Persily said.

"We don't know what the supplemental budget will be and voters just approved two bond issues," he said. "This assumes a flat budget, no increases and absorbs the bond issues."

Oil production on the North Slope has been slipping and should hold at just under 1 million barrels a day through fiscal year 2007, according to the report. In addition, production on larger, older fields has declined and has been replaced by new fields that pay a lower tax rate, Persily said.

The state's projections also are based on an assumption that the world will not go to war with Iraq, according to the report. If there is a war, the oil prices could spike at $30 a barrel in 2003, producing extra revenue for Alaska. After a war is over, the state expects oil prices would fall as Iraq boosts production to rebuild its country.

"Markets react to good news and fear about bad news," Persily said.

The state revenue forecast comes days before Gov.-elect Frank Murkowski takes office. On the campaign trail this fall, Murkowski said the state's budget gap was smaller than the Knowles administration's estimates.

Murkowski's fiscal plan would curb state spending and increase revenues by developing resources. He also has promised to evaluate the benefits of a oil price protection program to lock in state oil revenues while prices are high.

Joanna Markell can be reached at joannam@juneauempire.com.

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