Analysis: Fuel prices are spiking. Any relief in sight?

Oil and fuel prices are spiking. Is there any relief in sight?

Ask Vladimir Putin.

Even before Russia’s war on Ukraine pushed energy markets into a turmoil the oil supply market was tight and prices were trending above $90 per barrel. After Putin invaded, prices soared.

Supply-driven price peaks are not unusual and they are often followed by sharp reductions, and sometimes crashes, as markets readjust.

Whether that will happen this time, and when, is uncertain, and much depends on the course of war and on Putin. Even with an end to hostilities the efforts by European nations like Germany to wean themselves off Russian natural gas and oil will help keep prices high because alternative petroleum supply sources will be more expensive as will renewable energy, for a while at least.

Meanwhile, Alaskans are enjoying the runup in state oil revenues even as they share the pain of higher prices at the gas pump. The March 15 spring revenue forecast update predicts $1.2 billion dollars of new revenue this year and $2.4 billion in new income next year, and this has set up expectations for higher Permanent Fund Dividends, capital projects and more.

If Gov. Mike Dunleavy’s proposed $3,700 PFD is paid this year, as the governor hopes, it will consume $2.4 billion of the projected $3.6 billion in revenue surpluses over the next two years. However, don’t count on all the money coming in.

Oil prices are swinging wildly and whether price expectations that underpin revenues hold true will be a roll of the dice. State Department of Revenue officials told a state legislative committee last week, the House Ways and Means Committee, that the price for North Slope crude oil will have to average $114 per barrel for the rest of Fiscal 2022, or until June 30, to meet the latest revenue estimate.

At this point, with no clear end to the war in Ukraine in sight, $114 per barrel seems reasonable but price volatility in recent days shows how fast things can change – both ways.

Revenue department economists told the committee they finished the spring forecast March 9 with North Slope oil selling at $125 per barrel. The following day the price dropped $10 per barrel, according to chief economist Dan Stickel.

The week before the price was $98.69 per barrel. As of Friday, March 25, prices were $117 per barrel, up $2.17 per barrel from the day before. Although the war is driving the current price surge history shows how oil spikes are often followed by a swift plunge, and this could happen again if Ukraine fighting winds down.

In the briefing to legislators the revenue department showed a historical pattern of oil price spikes followed sharp drops. Fourteen years ago, in July 2008, Alaska North Slope crude oil was selling for $144.84 per barrel. By December it dropped to $29.15, when the nation’s financial crisis hit.

What followed was a long, gradual climb back to about $115 per barrel in 2014, but that was followed by a drop to $20/barrel six months later. That ushered in the three-year Alaska recession.

Again, prices gradually climbed back to the $95/barrel range in 2018 and 2019, but began dropping when COVID-19 hit. By April 2020 the price of ANS dropped to a negative –$2.77/barrel.

It began climbing back faster than expected and reached $125/barrel on March 8. It has since been very volatile, driven by war events in Ukraine. The spike and plunge, and long climb back, happened also in the 1980s and 1990s, demonstrating a path of slow recovery from sharp drops.

It’s also worth noting that fuel prices follow crude oil on the way up but are “sticky” when crude oil drops (meaning fuel remains high) because refiners want to take profits as long as they can. Eventually fuel prices will fall, but it will happen gradually.

Meanwhile, the governor has asked the Legislature to temporarily suspend the eight-cents-per-gallon motor fuel tax. Legislators haven’t done this yet, however. With gasoline prices over $4 a gallon eight cents a gallon won’t ease the pain very much.

But everything helps.