Falling Oil Prices Crush Alaska Budget

Ten thousand state workers in Alaska are going to lose their jobs July 1 if their state legislature can’t agree on a Fiscal Year 2016 budget by the end of June.

As with their colleagues in many of the other 49 states, Alaska legislators don’t have enough money to make ends meet and they are running out of couch cushions to search under for spare change.

Alaska’s budget deficit for Fiscal Year 2015, which will end June 30, is estimated to be approximately $3.8 billion. The Fiscal Year 2016 deficit could be $3.2 billion.

Tensions are running so high in Alaska that a post on the Alaska GOP’s Facebook page accused Gov. Bill Walker (I) of being a “hermaphrodite.” He is not, of course. Walker is simply a politician who professes to be neither a Democrat nor a Republican.

Another example of the frayed nerves in Juneau: The GOP didn’t pull down the post. Republicans just explained that its author, Art Chance, was a former labor analyst for the state of Alaska.

Gov. Walker has hired a mediator to try to help resolve the six-week-long and counting legislative budget conflict.

It is not as if bankruptcy was imminent.

Alaska does have a reserve fund upon which state officials can draw. But Walker pointed out in February 2015 when he released an amended budget proposal that Alaska was already hitting that to the tune of $10 million a day, and obviously that can’t go on forever.

“I have asked Matt Peterson to be available to step in and mediate this legislative impasse so we don’t have a government shutdown. I urge the legislature to take advantage of his expertise so we can move forward,” Walker said.

Peterson will have his work cut out for him. The “hermaphrodite” comment was just one shot fired across one party’s bow by another.

During the budget debate in the Senate, Democrat Sen. Bill Wielechowski said his party had held out an “olive branch” via a compromise bill, but the GOP had set that bill (and by inference the olive branch) “on fire.”

Sen. Anna MacKinnon (R) assured Wielechowski “there was no olive branch on fire” but still the two parties are deadlocked.

Sen. Pete Kelly (R) said Alaska is faced with “a deficit tsunami.”

Not to make light of olive branches that might or might not be burning, or even a budget tsunami, but this multi-billion dollar debate will seem as inconsequential as deciding who is going to pick up a bar tab compared to the financial problems facing Alaska in the years ahead.

Alaska’s problem in a nutshell is the state is close to completely dependent on the oil industry — a golden goose that experts predict will stop honking in another 50 years.

Gov. Walker tried to tell his Alaskan constituents in January 2015 the end was near.

Walker warned in an op-ed published by the Alaska Dispatch News that Alaska’s budget, which depends on the oil industry to provide 88 cents of every dollar spent by state government, was unsustainable.

“Imagine your family’s biggest source of income plummeting by 80 percent in one year. At today’s oil prices, that’s Alaska’s situation. The state’s oil and gas production tax is expected to bring the state $524 million in the current fiscal year, a shocking drop from the $2.6 billion collected last year,” Walker wrote.

As dire as that scenario is, Walker explained it is made even worse by Alaska’s tax credits to oil and gas companies that for the first time in history will result in negative returns to the state.

“The Alaska Department of Revenue projects the state will pay $625 million to producers through various oil and gas production credits. Subtract that from $524 million in production tax revenue, and we’re about $100 million in the red. Next year, the problem is expected to worsen, with the state netting negative $400 million on what has traditionally been our biggest source of unrestricted revenue,” Walker wrote.

“I have learned these bitter facts over the past few weeks, and I feel obliged to tell Alaskans the hard truth.”

But just as with the current budget dilemma, even if Alaskans figure out how to cut off the flow of tax revenue to the oil and gas industry, state politicians are still cowering under a Sword of Damocles because Alaska’s oil industry is doomed.

The price of Alaska crude hit a four-year low of $60.80 a barrel in mid-December 2014, just a couple of weeks before Walker penned his first warning of impending disaster.

Falling production in Alaska’s oil fields is adding to the crisis.

This is not a new problem. Alaska's production from 1988 until 2011 fell at a rate of approximately 61,000 barrels per day on a yearly basis, according to the U.S. Energy Information Administration.

Assuming crude prices of $100 a barrel, this represents a $2.228 billion decrease in yearly income, the financial web newsletter Seeking Alpha reported.

At the state's present rate of decline, that means the state will stop producing in roughly the year 2021.

When will the end of Alaska’s oil industry come? Even if Alaska produces about a billion barrels a day for the foreseeable future, Seeking Alpha predicted, Alaska's crude production will last only until 2062.

And that is the best-case scenario.