Higher oil prices would chop Alaska deficits by $500 million next fiscal year

Higher oil prices, if they hold, could reduce the deficit for the fiscal year that begins next summer by $500 million, legislative analysts estimate.

But the “Iffy” increase would still leave Alaska with a long-term deficit if the state pays higher dividends and does not increase taxes. Oil prices are at a seven-year high.

The Legislative Finance Division delivered a report to the House Ways and Means Committee Friday at 10 a.m.

Under the plan by Gov. Mike Dunleavy, there would be deficits for the rest of the decade, the analysis shows. The legislative update includes information on five constitutional amendments and 10 proposed changes to state law offered by Dunleavy and a variety of lawmakers.

Instead of a $1.142 billion deficit in fiscal year 2023 under the Dunleavy plan, as shown in the chart below, if oil prices average what they have been so far this fiscal year, the deficit would be about $600 million.

Dunleavy claims there would be no deficits, even with lower oil prices, because of assumptions about future budget cuts and unfunded items. The plan to reduce the state share for school debt reimbursement, for instance, is cut in half in the Dunleavy assumptions. This would require increased local taxes.

Oil prices are now above $85 per barrel, while last spring the prediction was for $61 oil. If oil averages $76 per barrel in the fiscal year that starts next July, the increase in revenue will be about $500 million.

Short-term predictions are a guessing game, though no one likes to call it that. Projected deficits or surpluses for 2030 are wild guesses and the numbers are entirely unreliable.

The governor and his allies in the Legislature will soon be saying that oil prices have solved all of the state’s financial problems once again, avoiding the political risk in tax talk. But oil prices have not solved all of the state’s financial problems.

All of the long-term projections about oil prices and oil production are more uncertain than they have been in the past. For instance, last spring the state increased the 2030 target for oil production by more than 100,000 barrels per day, compared to the forecast a year ago.

Given the delay in the Willow project and the Pikka project and questions about the future of other North Slope projects, that 2030 guess is wildly optimistic.

The international forces driving world oil prices are beyond the control of anyone in Alaska, which has always been the case. The response by industry and governments to climate change will weaken the political and economic arguments for expanding oil development in Alaska.

Is the current rise in oil prices a short-term phenomenon? Or is it a sign of things to come? No one really knows.