Time to panic about sinking Alaska oil prices?

752981_oil_pumpsWith the 49th state’s economic health harnessed to the oil industry, Alaskans are no strangers to wild fiscal rides. But as the state’s 2012’s books come to a close, the current dip in oil prices is not how Alaska financial experts prefer to start a new year.

The new fiscal year begins July 1, and the state is heading into it with oil prices slumping.

The oil industry is Alaska’s main money-maker. Oil production funds nearly 90 percent of the things that make the state tick: roads, schools, police officers, bridges, ports and more. On Thursday, Alaska North Slope crude sold for $93 per barrel, about $17 less than the average value the state predicted when it built its $7.6 billion spending plan for 2013.

‘We’re watching it’

To get the books to balance 12 months from now, the state will need the oil market to deliver an average price of $104 per barrel, the sweet spot between breaking even and coming up short.

“We’re watching it,” Karen Rehfeld, the state director of Management and Budget, said Thursday when asked if current prices have the state headed for trouble. “The current price heightens the concern that’s ever present.”

Ever-present concerns are a fact of life for any oil-reliant state. Oil prices, the number of barrels produced, and spending levels must align for the state to stay out of the red. Yes, Alaska has healthy savings to rely on in lean times. Yet Alaska budget hawks are loath to dip into it. Their goal is to avoid diminishing the reserves, knowing that days with far less oil will eventually arrive.

“It’s a huge concern,” Rehfeld said.

Since late February of 2011, the state has enjoyed oil prices above $100 per barrel, with an occasional bump above the $125-per-barrel mark. In June of this year, oil dipped below $100 a barrel for the first time in more than a year.

The drop is largely attributed to global market forces outside the United States. Among them: geopolitical instability in Europe and beyond, a European financial crisis and shifting oil production in the Middle East. There, in the wake of U.S. sanctions that effectively reduced Iran’s oil output, Saudi Arabia has put more oil on the market.

The key to knowing whether current prices will cause heartburn over Alaska finances is determining how long lower prices will last.  Some analysts predict that the downward trend is nearing its end, due in part to the seasonal nature of price fluctuations.

The state’s budget forecasts are based on averages. Months of lower values can be offset by months of higher ones. In a forecast published two months ago, the state offered a telling example. If a state needed a $50-per-barrel average to break even, and had experienced three months of $75 per barrel prices, it would only need prices for the remaining nine months to hover near $30 per barrel to hit the $50 average, it explained in a footnote.

Simply put, it’s too early to know whether Alaska’s 2013 budget may need some shaving to offset an unanticipated shortfall.

“We certainly would have to take a look at where we are in a few months. It’s early and we know that number is going to change,” Rehfeld said.

The silver lining

While lower crude prices don’t pad the state’s bank accounts the way higher prices do, there is a short-term silver lining for Alaska drivers: cheaper prices at the pump. In recent days, prices at some service stations’ prices have fallen below $4 per gallon for the first time in a while.

According to the website gasbuddy.com, a Shell station in Wasilla has the best price in the state, coming in at $3.88 per gallon. AAA is reporting Alaska’s current statewide average as $4.14 per gallon for unleaded, three cents higher than the same date in 2011, but 38 cents a gallon lower than in May.

AAA regional spokeswoman Tara Hanley projected that for the July Fourth holiday, Alaskans could see prices continue to drop, perhaps to an average of about $4.10 per gallon. The national average for the holiday weekend is expected to be about $3.34 per gallon.

Contact Jill Burke at jill(at)alaskadispatch.com

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