Thursday, June 7, 2012

Oil falls, but state expects a rebound

Tim Bradner
Alaska Journal of Commerce

State officials are warily watching market prices for North Slope crude oil, which dropped to less than $100 per barrel June 1 as markets reacted to slumping demand and a buildup of supply.

An average price of $104 per barrel is needed to balance the state budget for Fiscal Year 2013, the state financial year that begins July 1, according to state budget director Karen Rehfeld.

After trading at less than $100 on June 1 and June 4, Alaska North Slope crude edged back to $100.09 on June 5. It had been more than a year since Alaska North Slope crude traded for less than $100.

High oil prices have offset production declines that saw North Dakota surpass Alaska in March for the No. 2 spot in daily domestic oil production.

The U.S. dollar has also strengthened lately as investors hedge their bets against the turmoil in the eurozone, which brings down the price of all commodities priced in dollars.

If prices do remain low the state could technically experience a deficit but there is no immediate financial problem because the state has about $15 billion in liquid assets, mostly in two reserve accounts: the Constitutional Budget Reserve and Statutory Budget Reserve.

The oil price needed to support the state budget has increased gradually in recent years as oil production has declined and the state budget has edged up despite efforts by state legislators to contain it.

Steve Revenue Commissioner Bryan Butcher said oil market analysts are split in their views.

“Some see prices going down further, to the $80 or $90 per barrel range while others think we’ve bottomed out at $98, that the European factor (worry of recession) is already factored it, and that we could see a rebound quickly,” Butcher said.

For the long term the consensus is still that prices will remain above $100 per barrel, that demand will rebound in the U.S. and Europe, and that China will rekindle its economy with stimulus moves, Butcher said.

The state is still sticking with its projected FY 2013 average price of $110.44 per barrel and an average daily North Slope production of 563,000 barrels per day from the spring 2012 forecast, Butcher said.

The next revision in the forecast will come late this year as the state prepares its November revenue estimate, he said. The state prepares two revenue forecasts annually, one traditionally issued in November that includes an updated production forecast, and one in late March or April that focuses mainly on updated price and revenue estimates.

State revenue economist Dan Stickel said state revenues for the 2012 fiscal year-to-date were on track with estimates through April, but that revenue officials noticed a softening in May.

June numbers will not be available until next month.

The total state budget for the current year, Fiscal 2012, is $13.48 billion including federal and state funds. Revenues for the year are estimated at $14.347 billion.

For Fiscal 2013, beginning July 1, the budget as approved by Gov. Sean Parnell is $12.07 billion of all funds, with $12.59 billion in total revenues.

The 2013 budget will inevitably increase to some degree with supplemental appropriations, which are made necessary by unexpected expenditures, such as costs of an unusually intense summer fire season.

Because of the estimated large surplus from Fiscal Year 2012 revenues the Legislature appropriated $1.8 billion to the Statutory Budget Reserve. The projected FY 2013 surplus is smaller, and for that year legislators made a smaller appropriation to the reserve fund of $250 million.

North Slope crude oil is sold mainly on the U.S. west coast. About 50 percent of the fuels used in Washington State are made from crude oil from the North Slope, and about 25 percent to 30 percent of fuels in California are derived from North Slope oil.

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