Falling oil prices are already having an impact on Alaska’s revenue forecast

  • The tower of BP's Parker Rig 272, which is drilling into the Lisburne Reservoir at drill site L3 in Prudhoe Bay on Friday, May 22, 2015. (Loren Holmes / Alaska Dispatch News)

Oil prices are tumbling as markets see signs of weakening demand amid stronger supply. It’s good news for consumers, but a financial hit for oil-producing nations — and Alaska.

Crude oil prices have fallen to their lowest level in more than six months, pulling down Alaska North Slope crude into the high $90s as of Tuesday’s close — a drop of nearly 25% from this year’s peak in early June of almost $128 a barrel.

U.S. benchmark West Texas Intermediate closed Tuesday at just over $87 a barrel.

As of mid-July, the rapid and consistent drop in prices had shaved more than $1.5 billion from the Alaska Department of Revenue’s March forecast of total state oil tax and royalty receipts for the current and next fiscal years.

The updated revenue estimate is based on the futures market — where international buyers and investors see prices for global benchmark Brent crude heading in the months ahead.

Since the department’s July 18 update, the futures market has slid an additional $3 a barrel, on average, which, if it holds throughout this year and next, could deduct several hundred million dollars more from state revenues.

“If prices go under $87,” the state budget for the current fiscal year “is underfunded,” Alexei Painter, director of the nonpartisan Legislative Finance Division, said earlier this month. That could set up the Legislature to cover any gap by withdrawing from Alaska’s Constitutional Budget Reserve Fund, which would require a politically contentious three-quarters majority vote of the House and Senate next year.

Whether that happens will depend on factors far away from Alaska.

The steep drop in prices of the past two months is mostly due to China’s weakened economy and the growing likelihood of a global recession ahead — both of which would cut into fuel demand — and prospects of a U.S.-Iran nuclear deal, which could add more oil to global supplies.

China consumes about 15% of the world’s oil, and its demand for crude and refined products is a major driver of global prices. Further weak economic news from China helped push oil prices down more than $3 a barrel on Monday and almost as much Tuesday.

China’s economy still is expected to grow, but at a slower pace. Economists at the London-based, multinational bank Standard Chartered cut their 2022 growth forecast for the Chinese economy on Monday to 3.3%, from 4.1% previously — and down substantially from an 8.1% growth rate in 2021.

Strict COVID-19 lockdowns in China, while containing the spread of the virus, have cut deeply into economic activity in all sectors. 

“We expect the path to China’s economic recovery to be a slog,” Standard Chartered economists Wei Li, Shuang Ding and Hunter Chan said in a note to clients.

Resilient oil supply from Russia also is factoring into lower oil prices. While Western sanctions have reduced Russia’s ability to sell crude, the country has discounted its oil to fetch willing buyers, maintaining more production than markets had anticipated when prices shot into the $120s after Russia invaded Ukraine and sanctions were imposed.

“Russia has managed to keep sending oil out at greater volumes than people expected,” said Derek Bower of the Financial Times in London in a podcast interview published Monday.

U.K.-based Barclays bank on Monday cut $8 from its oil-price forecast for this year and next, citing Russian volumes and an expected surplus on the global market.

Falling prices are “really about ‘three R’s,’ ” Bower said. “Recession, fierce recession. Recessions tend to kill oil demand growth.” Then there’s Russia. “The notion that Russian production was going to collapse has not materialized.”

Bower’s third “R” is “releases of oil from the U.S. and other western countries’ strategic emergency stockpiles,” in anticipation of a bigger cut to Russian supply. “All of this oil from the emergency stockpiles around the world has seeped into the market,” he said, easing supply worries and contributing to the price drop.

A fourth “R” not on Bower’s list is the return of U.S. oil production growth. Average U.S. crude output reached 12.2 million barrels per day during the first week of August, the highest since April 2020, according to the U.S. Energy Information Administration. The return of drilling, hydraulic fracturing and producing is bringing U.S. output closer to its record of 12.9 million barrels per day in December 2019.

Adding to market worries of too much supply overtaking lower demand growth, Saudi Arabia's Aramco announced last weekend that it was on track to expand production by a million barrels a day by 2027. Certainly, the Saudis could scale back or delay their expansion plans if prices fall too low.

The Organization of the Petroleum Exporting Countries in its monthly report last week dialed back its forecasts for global oil demand this year and next, though by a small 260,000 barrels a day — enough to add to market fears and the continued fallback in prices.

The reversal in oil prices has helped bring down gasoline prices in the U.S. from a record above $5 a gallon in June. AAA reported Tuesday the average price of a gallon of gasoline in the U.S. was $3.95 on Tuesday, though almost $1 more than that in Alaska.

Going forward, a big factor in crude oil prices will be “whether China is going to emerge from COVID lockdowns and consume oil with the same almost insatiable thirst that it had before the lockdowns took hold,” Bower said in his podcast.

“I think oil prices could go lower,” Sarah Emerson, president of ESAI Energy, a global analytics company based in Massachusetts, told The New York Times. “We have several factors coming together at the same time: We have China reducing its imports of crude oil in the third quarter, we have the end of the summer gasoline season, we have concerns about an economic slowdown, and frankly, plenty of supply.”

Of course, the price arrows could reverse. “That is not to say prices won’t go back up,” Emerson said. One unknown is how much the world — particularly Europe — burns more oil to generate electricity in lieu of expensive and scarce natural gas.

“Oil prices always have the capacity to surprise,” Daniel Yergin, the energy historian, was quoted in The New York Times on Monday.

08/17/2022 - 5:27pm