Oil price drop blows a billion-dollar hole in state revenue expectation

Falling prices have blown a big hole in the state of Alaska’s forecast for current-year state revenue, but optimistic assumptions last spring, when the forecast was made, may have played a role.

The state Department of Revenue released its fall revenue forecast Dec. 15, projecting a drop of $1.1 billion in current year income compared with what was expected last March, in the spring forecast.

The revenue department does two forecasts yearly, a detailed document typically issued In December and an update in March that is relied on by the Legislature in writing the state budget.

Last spring Gov. Mike Dunleavy said he based his decisions on spending on an expectation that crude oil prices would average $112 per barrel over Fiscal Year 2023, the current state budget year that ends June 30, 2023. The Legislature adjusted the price expectation downward to about $102 per barrel.

The latest average forecast for the current year by the Department of Revenue is $88.43 per barrel. Compounding the problem is that oil production Is now expected to average 10,600 barrels per day lower than what was expected last spring.

The combination of the two is a $1.1 billion decline in revenues compared with what was forecast last spring.

Fortunately, the state has about $1 billion in its main ready asset reserve, the Constitutional Budget Reserve that can cover a shortfall.

While volatile oil markets have damaged the state’s income expectations, earnings from the $70 billion-plus Alaska Permanent Fund help support the budget and are proving more stable. The Permanent Fund will pay $3.4 billion in budget support in the current year and $3.5 billion next year, the revenue department said Dec. 15.