Thursday, December 4, 2014

Important numbers ...

Yesterday while discussing an article from the Wall St. Journal ("Saudi Arabia Sees Oil Prices Stabilizing Around $60 a Barrel") a reader observed at that price Alaska's revenues would meet only one-half the state budget.  The observation was based on previous pieces here that used $120-ish as the oil price required this year to balance the state budget, so half that in oil price means half in revenues also, right?

Unfortunately, no.  A significant part of Alaska's revenues are derived from its production tax.  Because that tax is based on net profits, revenues drop proportionately to the drop in profits, not price.  By the time price reaches $70/bbl, revenues from the production tax are almost gone and at $60 they are.  Largely all that remains at that point are revenues from the state's royalty share of production and roughly $500 million in non-oil related revenues received mostly from a variety of other taxes.

As I was contemplating how to respond to the reader's comment I stumbled upon a section from last year's Department of Revenue Fall 2013 Revenue Sources Book (at p. 88-89) that includes a very helpful chart for considering these things.  As you will see, at $60 oil the state's revenues (we are currently in FY 2015) decline to roughly $2.1 billion, about a third of this year's spend (not half).  While regardless of how low prices go the average for this fiscal year will end up somewhat higher (because the first few months were at significantly higher price levels), sustained lower prices from here forward ultimately will drag the average price down to very low levels.

Interestingly, in reviewing the chart I realized also that the $120-ish figure I (and Dermot Cole) had been using previously for this year's budget "break even" price is somewhat off.  This year's budget is $6.2 billion. Using the chart, that correlates to a break-even price of just slightly under $125/bbl.

Which leads me one more time to a comparison of Alaska's fiscal situation with other Petrostates.  Another Wall St. Journal article yesterday ("Analysis: Oil-Price Drop Adds New Element to Middle East Tensions") contained yet another analysis of the break even price of various oil-dependent nations, this time based largely on an analysis recently done by the International Monetary Fund.

The results are here.  While not the highest in the world (Libya apparently tops the list at $184/bbl), at $125/bbl Alaska's breakeven price nevertheless rests well in the upper tier, on par with Iran ($130), Algeria ($130) and Nigeria ($123), running well ahead of Venezuela ($117), Saudi ($106), Russia ($100 based on other analyses) and Iraq (also $100), and an order of magnitude above the UAE ($77), Qatar ($60) and Kuwait ($54).

Fiscally conservative?  That would be someone else.  During its 2013 session the Alaska Administration and Legislature rightfully spent a lot of time benchmarking the state's oil tax rates against those of other nations.  In the process, however, they overlooked benchmarking their own spending behavior against those of the same peers.

In FY 2011, Alaska's budget balanced at an oil price of $78/bbl. This year (FY 2015), just four short years later, it's $125/bbl.

Incoming Governor Bill Walker faces a huge challenge in moving Alaska back into the range of fiscal reality. Hopefully, these and other numbers they will hear during the coming session will move the legislature to help.