By Mark Edwards
As is tradition, Northrim Bank will publish the annual Alaska Economic Update. The full publication will be available later this spring, but we wanted Alaskanomics readers to get a sneak peek at the issues facing Alaska and its economy. We will break the report into sections and in the near future, post the full report to the ‘Resources’ section for your convenience.
The largest economic issue facing Alaska in 2016 is the falling price of oil. As of the end of January the price for a barrel of Alaska North Slope crude was $31.72. This is following an extended period where oil remained above $100 a barrel between April of 2011 and July of 2014. The dramatic decline has created a multi-billion dollar budget deficit for the State government; led to some cut backs in industry spending and employment; and created uncertainty for investors and businesses. The major question is how long the low price environment will last.
January of 2015 began with prices averaging $48.87. The first half of the year saw a steady climb up to an average of $64.42 in June. However, since that time prices have consistently retreated into the current $30 range. Traditional logic states the over-supply of oil that led to the recent price drop should moderate as higher cost producers are not able to operate profitably. Companies can only attract capital or finance losses in the short-term. There is concern that many government-owned oil companies have reached such a low level of income that they are forced to ramp up production, even at low prices, to generate cash flow. This oversupply response only creates a downward spiral for prices.
However, demand for oil continues to increase as the global population nears 7.5 billion people and their standard of living improves. Low prices also lead to more consumption as people worry less about fuel efficiency, ride sharing and they travel more. The market should rebalance oil inventories and prices are expected to rise as unprofitable producers stop supplying oil and these demand forces grow.
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