While Alaskans hope for a rebound in oil prices, the state’s top revenue economist warned the Alaska Senate Finance Committee that even if prices rebound, they may not stay high for long.
John Tichotsky, chief economist for the Tax Division of the Alaska Department of Revenue, told legislators that global oil production outpaced demand by almost 2 million barrels per day in 2015, but 2 million barrels isn’t what it used to be.
Today, the world consumes almost 95 million barrels of oil per day, close to the highest consumption rate in world history. Even though 2 million barrels represents a big surplus on global markets, it’s a relatively small margin — about 3 percent — of global demand.
In the 1980s, when oil prices plunged, the difference between supply and demand was on the order of 20 to 30 percent, Tichotsky said.
With margins tighter, small changes in the global picture — a field running low, a pipeline offline, regional conflict — can swing prices wildly.
“Volatility, I think, is the long term and short term name of the game,” Tichotsky said.
Tichotsky and his team have estimated that Alaska North Slope crude oil will average $56.24 in the next fiscal year, which runs from July 1 through June 30, 2017.
If that happens, the state would earn $1.2 billion in oil revenue; once tax credits are added into the equation, that figure drops to about $600 million. Neither figure includes proposed budget reforms or tax credit reforms.
During Tichotsky’s presentation, Sen. Mike Dunleavy, R-Wasilla, asked if it was a wise approach for the state to expect oil prices to average more than $56 per barrel next year.
“I can’t recall when we’ve ever been right,” he said of the state’s revenue estimates. “Why not undershoot the projections and come out at least once with an underestimate?”
“What’s realistic?” responded Tichotsky, who says he lives in a “probabilistic world.”
Oil prices could be anywhere from $15 per barrel to $120 per barrel next year, and “these deterministic models are only good if you’re sure of what’s going to happen.”
If you’re looking for an exact estimate, “if you hold these deterministic views in your mind, you’re going to be exactly wrong,” he said.
Sen. Anna MacKinnon, R-Eagle River, right, questions John Tichotsky, chief economist for the Department of Revenue, during a revenue forecast presentation to the Senate Finance Committee at the Capitol on Monday.
