Oil prices in three charts ...

The International Energy Agency yesterday published its November report.  Like the U.S. Energy Information Administration's November Short Term Energy Outlook (STEO) published two days before, the IEA's report catches up with the fundamentals fueling the recent, dramatic drop in oil prices and applies them going forward.

And, like the STEO, the IEA similarly sees a hugely changed outlook.

The EIA's November STEO makes one of the most dramatic month-to-month shifts in oil price forecast I recall seeing in my three-plus decades in the industry.  Just the month before, in the October STEO, EIA had predicted 2015 oil prices (Brent) would average $101.

After having the time to look at the shift in fundamentals driving the oil price decline, the November STEO now predicts 2015 Brent will average $83.

The IEA similarly sees a fundamental shift taking place. As reported yesterday in Platt's blog, The Barrel, the subscriber version of the IEA November report (which will be made public in two weeks), concludes this about oil prices:

 ... it is increasingly clear that we have begun a new chapter in the history of the oil markets.

The IEA regularly includes charts with its reports showing the fundamentals affecting the market.  The three charts included with this column are from the November report.  The one that is most striking -- and the one that explains it all to those who follow the industry closely -- is the second shown here, which tracks world oil supply.  Against increasing, but on a relative scale slowing demand, the ramp up in oil supply is remarkable.

Explaining why it believes oil markets have entered a "new chapter," IEA looks forward at both supply and demand.

On supply, IEA concludes, "While falling prices may well trim investment in US light tight oil (LTO), such potential cuts should not be misconstrued as a production drop, and indeed would likely pale in comparison with recent gains in LTO productivity.  Cost reductions and efficiency gains in LTO production have been constant, and price pressures would only provide more impetus for producers to cut costs further.”

In other words, says the Platts' summary, "the US shale boom is not going away;" the drop in prices will simply be taken out of the hides of the highly competitive oil field supply industry.

On the demand side, the IEA concludes, "Economic development no longer spurs oil demand growth as it once did, especially in the absence of wage gains. China, the top source of incremental oil demand in recent years, has entered a less oil-intensive stage of development ...."

With supply increasing and demand moderating, like EIA before it the IEA now sees an extended shift in price.  

“Our supply and demand forecasts indicate that barring any new supply disruption, downward price pressures could build further in the first half of 2015.... While there has been some speculation that the high cost of unconventional oil production might set a new equilibrium for Brent prices in the $80-$90/b range, supply/demand balances suggest that the price rout has yet to run its course.

As I have explained elsewhere, the consequences to Alaska of such a shift in pricing dynamics are huge.

Yesterday I heard an Alaska legislator try to discount that -- and justify continued state spending in the range of current levels -- because oil prices are going to "bounce back."  The EIA, IEA and other highly respected oil analysts increasingly are concluding that is not likely to be the case.  The legislator didn't cite any sources for the optimism.

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?

The next steps ...

As some readers are aware I have been running a radio spot this week in support of Alaskans for Sustainable Budgets (AK4SB).  The spot started the Wednesday following the election and will continue through Monday.

This is the first of what I anticipate will be a series of spots which will run periodically in the weeks leading up to and during the legislative session in coordination with with a series of commentaries and other presentations at ItsOurFutureAK.com.

With the state facing a historic revenue shortfall and budget deficits, it's time for Alaskans to become more knowledgeable and involved in the state's fiscal situation.  The purpose of the radio spots, commentaries and website will be to help educate Alaskans about the situation and to provide them with ways to become involved in bringing about change.

The effort largely will be centralized through the AK4SB website.  I encourage readers to follow along there if interested.

The audio of this week's radio spot is here.  The script follows:

Hi, I’m Brad Keithley. Like you, I’m glad the election is over. 

Now, it’s time to put Alaska’s fiscal house in order. 

During the campaign, the state’s fiscal condition didn’t stay still -- it got worse. The price of oil dropped dramatically. This year’s state budget spends about $6 billion, but at current oil prices, revenues will total only about 3 billion. That’s a deep hole. 

Getting out of that hole means making tough choices, and, we know, our leaders can’t do it alone. They’ll need the support of people like us, people who believe in a simple, common sense principle – that Alaska must live within its means. 

A couple of years ago I founded Alaskans for Sustainable Budgets so Alaskans could work together to help fix the budget. 

I pledge to work with the leaders we just elected – both those I supported and those I didn’t – as they address the state’s fiscal gap, and I’m asking for your help. 

Join us at ItsOurFutureAK.com to help put Alaska on the right track and to urge legislators to support sustainable budgets. We need to fix this. Working together we can. 

ItsOurFutureAK.com

The Alaska Dispatch News candidate questionnaire ...

In the closing week of the campaign the Alaska Dispatch News published responses to a questionnaire it circulated toward the end of the campaign to legislative candidates.  The questionnaire asked the candidates for their positions on various issues.

Several of the questions on the list relate to state fiscal policy.  The fourth question asks directly about sustainable budgets ("What amount of state spending do you believe is sustainable? If cuts need to be made, where should most of the money come from, the operations budget or the capital budget?").

Some of the responses to that question are surprising.  With the fall in oil prices, the Department of Revenue currently estimates that state revenues this year might not cover even half of state spending, leaving a gaping hole of roughly $3 billion in the state's budget.  Yet, when asked to identify where cuts can be made, State Senator Cathy Giessel responded:  "We cannot cut our way out of this."

Other answers are more realistic.  State Senator Anna Fairclough, for example, responds to the same question as follows:  "Our current budget funding state government, public safety, transportation, and other much-needed programs is not sustainable at our current revenue projections. The state needs a fiscal plan to work through different scenarios in order to identify where cuts would be most effective and efficient."

It will be useful to delve into the responses further once the elections are behind and the more difficult task of governing and legislating -- in other words, facing up to the real world -- lies ahead.  For now, however, if any are reading this column on election day and haven't voted yet the questionnaire and responses provide a useful resource worth reviewing before doing so.  Again, the responses are here.