Thursday, November 13, 2014

Perspective: what if it was production instead of price ...

As I talk to others, some are having a difficult time envisioning the impact on state revenues of the recent drop in oil price.  Because of the recent Proposition 1 (SB 21) campaign, more are familiar with the potential effect on state revenues of changes in production than they are changes in price.

Following up on that, a reader asked me yesterday what the impact of the recent drop in price would translate to if it were in production instead of price.

After thinking about it a bit this morning, using information provided in a recent Dermot Cole column reporting on his conversations with state officials, and taken from the Legislative Finance Division's FY 2015 Fiscal Summary and the Spring 2014 Revenue Sources Book I calculated what the change would need to be if the impact on state revenues from the recent price drop were the result of a production drop instead.

The result?  Fairly staggering.  During the last legislative session the state estimated production this fiscal year would average around 500,000 (498,000 to be precise) barrels per day.  The effect on state revenues of the current dive in prices (assuming prices average out at $85/barrel for the year, which is an increasingly heroic assumption) is the same as if prices stayed the same as projected, but production fell instead to roughly 300,000 (293,000 to be precise) barrels per day (about 40% lower than current levels).

Think about that for a moment.  What would be the reaction if some morning the headline on the Alaska Dispatch News read "Oil Production Drops 40% Since September 1 With No Recovery in Sight."  

Yep, that is the equivalent of what is going on with price.  Does that help?