By: Mark Edwards – Senior Credit Officer & Bank Economist
We conclude our Alaska Economic Update today with a look at Oil Prices, State Budget Issues and the Federal Government.
Oil Prices - Oil prices have fluctuated between $47 and $71 over the last twelve months and finished February 2018 at a monthly average of $66.20. They are forecasted to average $56 per barrel in FYE 2018, according to the State of Alaska Department of Revenue.
Alaska’s crude oil production averaged 540,600 barrels per day in FY 2017. This was an increase of 9,300 barrels per day over the previous year and the second year of production growth. The State Department of Revenue forecasts production to rise again in FY 2018 to 550,100 before settling back to 547,900 barrels per day in FY 2019.
The low price environment experienced between 2015 and 2017 caused companies to cut back on spending as certain projects were no longer economically viable. This led to a reduction in State revenues and a loss of thousands of high paying oil and gas related jobs.
State Budget Issues – Low oil prices over the last three years have left the state government with a multi-billion dollar budget deficit due to the heavy reliance on oil taxes to fund government. A short-term drag on the economy has been occurring as the legislature made the difficult decisions to move towards a sustainable balanced budget by cutting government spending and limiting dividends. That impact has been reduced slightly from higher than expected returns on the State’s sizable investment portfolio and improvement in oil production and prices.
The FY 2018 approved budget includes some reductions to government spending and limiting the size of the Permanent Fund dividend to about $1,200 per resident. Total State appropriations, including the dividend, are budgeted for $10.2 billion in FY 2018, down from $10.75 billion in the prior fiscal year. As a comparison, the FY 2015 budget was $12.1 billion. Over the last three years the state government budget has declined by $1.9 billion or 15.4%. The aggregate dividend payout is $582 million lower, the capital budget has been reduced by $529 million, and the operating budget has been reduced by $774 million, according to the Alaska Governor’s Office of Management and Budget.
Revenues have been increasing primarily due to above average investment returns. The Alaska Permanent Fund returned over 12% in FY 2017. This accounted for $3.2 billion of the total $3.4 billion the State earned in its investment portfolio. Oil prices have remained well above the State’s budget forecast for the last five months, which would result in several hundred million in increased petroleum revenue for the State if that persists through the end of the fiscal year in June of 2018.
Current and future deficits are expected to be funded out of the Constitutional Budget Reserve Fund (CBR) or the Permanent Fund Earnings Reserve Account (ER). The Alaska Division of Legislative Finance reports the CBR had $4.4 billion and the ER had $12.8 billion at FYE 2017. The CBR is projected to have $2.2 billion remaining at the FYE June 30, 2018 and the ER is projected to grow to $15.7 billion. In total at FYE 2017, the State had $17.6 billion in undesignated reserve accounts and another $1.5 billion in accounts designated for specific purposes, such as the Power Cost Equalization Endowment, the Community Assistance Fund and the Alaska Higher Education Investment Fund. The net sum of these accounts is projected to increase by nearly $600 million at FYE 2018 to $19.6 billion.
In addition, the Permanent Fund principal, excluding the ER, was $47 billion at FYE 2017. That is budgeted to grow to $47.6 billion in FY 2018. A majority of the investment returns are budgeted to be kept in the ER because they are capable of being appropriated by the Legislature for spending.
Another option that has been discussed intensely is dedicating a portion of the earnings of the Permanent Fund, or a percentage of its market value, to partially fund state government. Broad based taxes are also being discussed seriously.
Federal Government - The change in federal administration in 2017 has the potential to positively impact the government regulation of natural resource development in Alaska and is likely to increase the levels of military and domestic infrastructure spending. Alaska’s strategic location will unfortunately benefit from tensions rising in Asia, specifically in North Korea. Fairbanks has been positively impacted by the announced transfer of two F-35 squadrons to the local Eielson base between 2020 and 2022. They expect a large increase of in base population, adding around 3,500 people including families. This is projected to require over $550 million in base construction and significant residential construction both on and off base, according to a presentation by officials at Eielson Air Force Base.
There is renewed optimism in Alaska for future natural resource development as the new federal administration has taken action to achieve domestic energy independence. According to the U.S. Department of Energy, in November of 2017 oil production exceeded 10 million barrels a day (BPD) and broke the U.S. record that has lasted since 1970. That moved the U.S. past Saudi Arabia and we are now second only to Russia in total oil production in the world. Forecasts project over 11 million bpd is possible this year due to continued shale production gains in Texas and North Dakota. The U.S. also set an all-time record for natural gas production in the lower 48 of 87.1 billion cubic feet a day.
The comprehensive change to the U.S. tax code includes a provision opening the coastal plain of the Arctic National Wildlife Refuge for oil and gas exploration and development. The law requires two large lease sales within four and seven years, with half of the royalties going to Alaska. There have also been executive orders reversing the prior administration’s policies regarding climate change and offshore leasing in the Beaufort, Chukchi and Cook Inlet.
Two Alaskans have recently been appointed for important positions in the U.S. Department of the Interior. Joe Balash is now the Assistant Secretary for Land and Mineral Management. Tara Sweeney, an Alaska native leader from Utqiagvik, was nominated for Assistant Secretary of Indian Affairs. Their representation in Washington D.C. should help with numerous Alaska regulatory issues.
Written by Mark Edwards, SVP Senior Credit Officer and Bank Economist with Northrim Bank. He was an adjunct professor of economics at Alaska Pacific University. Market served the State of Alaska as an Economist in the Department of Commerce and the Department of Revenue, and as the Director of the Office of Economic Development. He has a B.A. in Economics from the University of Virginia and a Master’s Degree in International Business from the Thunderbird School of Global Management.
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