There is a lot of discussion regarding the State’s budget and the crunch that is coming in the near future if things do not change. In the October 13, 2014 issue of the Bradners’ Alaska Economic Report, three trends are discussed that will cause an issue for the state after 2020.
It should be no surprise that the decline in oil production is of concern to many in Alaska. This is nothing new for the state, as the decline started in 1989. The past fiscal year saw the decline go from 6 percent to zero percent and there is hope that the new and increased activity on the North Slope will keep the decline flat for a few years. Scott Goldsmith, from UAA’s Institute of Social and Economic Research (ISER), predicts that production would have to increase 2 percent each year to make a dent in reducing the state deficit. One year of flat production is good, but far from the needed increase make a difference for the state budget.
In the past four months, the price of crude oil has gone from a healthy $110 per barrel down to below $90 per barrel in October. It is hard to say if the drop is only temporary or a more long term concern. The budget deficit for FY2015 will be increased if the price stays below $100 per barrel for an extended period of time. While lower prices are good for consumers, it is not good for the state. It is possible that prices will remain low because the supply is very high right now and demand has not risen to soak up the extra supply. It is simple Econ 101, the more supply that is available and the lower the demand, the lower the prices will be.
The final trend outlined by Bradner is more complex and involves the state’s operating budget. Last fiscal year, the state operating budget was $6.44 billion, which was up from $4.28 billion in FY10. According to the Legislative Finance Division, state operations spending, including agency budgets and other statewide operations, has almost doubled in the past 10 years. Much of the increases have been masked due to cuts to capital spending, but the increase is still visible.
With these three trends, there is much discussion about how to reign in the deficit. Many believe that a natural gas pipeline would save the state budget. If the project stays on track, it could be operating in the next ten years and would add significant revenue to the state’s stretched budget. Much will be revealed in the coming months/years on the progress of the gas pipeline. There will also be an update on the oil production forecast before the end of the year. This will hopefully show that the production increase seen at the end of FY14 has continued and that there is good news for the remainder of FY15.