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Oil income to keep state coffers full

Prices could lead to $653 million surplus

Posted: Friday, December 10, 2004

Oil prices are likely to stay high for the next year and a half, resulting in hundreds of millions of dollars for the state, according to predictions by the state Department of Revenue.

The fall forecast released Thursday predicts the price of a barrel of North Slope crude oil will average $43.61 through fiscal year 2005, which ends June 30, next year, according to Revenue Commissioner Bill Corbus. That's about $15 above the department's projection last spring, which said oil would average $28.30 per barrel.

Oil income accounts for about 84 percent of revenue in the state's general fund but is expected to decline to about 74 percent by 2015.

If the prediction is correct, oil income would contribute a $653 million surplus to state coffers in 2005, Corbus said.

The average price of a barrel of oil is projected to drop to $34.50 per barrel in 2006 and $30.95 per barrel in 2007, Corbus said. The forecast predicts oil production will average 934,000 barrels per day through 2007.

Oil prices on Wednesday were at $35.62 per barrel, dropping about $16 a barrel in the last 47 days, Corbus said. Alaska North Slope crude averaged $43.16 per barrel in November.

"We've had a wild ride of late," Corbus said. But oil market fluctuations aren't new to the state. He said the price of oil dropped in 1991 and 2003, in anticipation of the first and second U.S. wars with Iraq.

"Although the drop has been steep, we've been through this before," he said.

Corbus credited the recent volatility in oil prices to the declining value of the dollar, increased global demand, particularly in China, and political unrest in some oil-producing nations. He said the "fear factor" of terrorism also has affected global oil markets.

The political volatility can contribute $10 to $15 per barrel premium to oil prices, according to recently retired Revenue Department petroleum economist Chuck Logsdon.

"We're talking about the usual suspects: Iraq, where there is a very active insurgency that, I'm sure, would love to take out some oil facilities," Logsdon said, listing Venezuela, Nigeria and Saudi Arabia as other areas of potential political volatility.

According to the fall projection, the state has until 2011 before the Constitutional Budget Reserve, the state's savings account, is depleted. The revenue forecast last spring predicted the budget reserve would run dry in May 2008. The budget reserve has been used 10 of the last 13 years to bridge the gap between income and spending.

"We can use these high prices as an excuse to do nothing about our traditional mismatch of recurring revenue and spending or we can view these high prices as buying a little time to follow through on the governor's initiatives to put our fiscal house in order," Corbus said in a written statement.

The projected depletion of the CBR assumes the Legislature will maintain an annual budget of $2.3 billion.

• Timothy Inklebarger can be reached at timothy.inklebarger@juneauempire.com.



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