$2 billion more to state treasury as oil prices rise; Governor calls for supplemental PFD

Alaskans are groaning at the gas pumps once again as fuel prices climb, but a silver lining is an extra $1.2 billion that higher crude oil prices will pump into the state budget this year.

Another $1 billion extra is expected next year, if the forecast released by the state Department of Revenue last Friday holds true.

The extra money will pump the state’s Undesignated General Fund revenue – the amount state legislators can appropriate – to $5.97 billion in the current state fiscal year, which ends June 30, and to $6.28 billion next fiscal year, which begins July 1.

The estimates are based on predictions that Alaska oil producers will be able to sell their oil for over $80 per barrel for the remaining eight months of the fiscal year and that oil production will average 488,400 barrels per day over the 12-month fiscal year from last July to June 30.

With a surge of new revenue now possible Gov. Mike Dunleavy is asking legislators approve a supplemental Permanent Fund Dividend.

That’s considered unlikely for the near term. Tuesday, Nov. 2, is the final day for a fourth 2021 special session of the Legislature, and legislators would have to come back for a fifth special session to do what the governor wants.

However, of the revenue estimates hold the Legislature will be under heavy pressure approve an extra dividend when the regular session begins in January. The pending 2022 elections may help drive that because with money in the bank some lawmakers will champion a higher PFD as they face voters.

The governor leaves no doubt as to where he stands: “It is entirely within our capacity to help residents manage their bills with a supplemental PFD of $1,236,” in addition to the $1,114 dividend for this year that is now being paid,” Dunleavy said in a statement.

“The state is now making hundreds of millions of dollars in additional oil production taxes, while Alaskans, recovering from job loss and the pandemic economic slowdown, are now facing rising energy costs,” the governor said.

Inflation is at a 13-year high and gasoline, diesel and heating oil prices in Alaska are rising sharply, Duneavy said.

The governor said North Slope oil price increases are at a seven-year high, bringing additional revenues through state oil royalties and production taxes.

Also, “the value of the Alaska Permanent Fund (has) experienced an unprecedented increase, raising it to more than $82.7 billion as of Oct. 27,” the governor said.

The additional income also means that the extra dividend can be paid out of current revenues and with no requirement for an extra draw from Permanent Fund earnings beyond the amount the Fund now provides every year to the state from its earnings.

The need for an extra draw to pay the higher PFD, or new taxes as an alternative, were the major reasons why most legislators balked at a PFD higher than $1,100 this year.

A $1,236 supplemental PFD would require just over half of the $1.2 billion in extra income the state could receive, leaving several hundred million dollars for other needs, like the estimated $2 billion in deferred maintenance on state and university buildings.

It is possible, however, that the revenue department is too bullish in its estimates. The oil price forecast, for example, was based on several days of recent high prices and is a bet that high prices will continue. But oil markets are fickle.

The spring forecast for FY 2022 from the department was more cautious, assuming an average price of $61 per barrel for the current year, and that oil production would average 459,700 barrels per day instead of 488,400 in the new estimate.

There are indications that higher prices will remain for a while. The U.S. economy is emerging from COVID-19 shutdowns and pent-up demand for travel is fueling new oil demand.

Still, crude oil prices are notoriously unpredictable. In late 2015 oil prices unexpectedly crashed, and it took years for a recovery to take place.

A similar crash happened in early 2020 due to the COVID-19 recession. Prices are coming back faster than expected but the future of the virus is a big unknown.

There are risks for oil production, also. The estimate of a 488,400 barrels per day average for this year is partly underpinned by expectations that two new ConocoPhillips oil projects now in development will finish on schedule late this year and will meet performance targets.

There are always uncertainties for new oil projects because of unexpected problems with underground producing reservoirs can develop. There are examples of new fields on the North Slope that fell well below their targets.