Oil slump: talk outlines implications of price drop

PALMER — Alaskans have faced oil price crashes at least three times and survived, Tim Bradner told an audience at Mat-Su College Thursday night.

“We have been here before,” he said.

And while budget deficits — widely reported to be about $2.5 billion — could eventually lead to steep cuts, for now the state is in a relatively stronger financial position, with reserves totaling about $14 billion, Bradner said.

“That’s not the permanent fund,” he said. “That’s just the ready cash reserves, which the state will have to draw down.”

Bradner spoke at the inaugural lecture at the Glennn Massay Theater at Mat-Su College Thursday. Bradner has written about oil production in Alaska since the late 1960s, and has served as a lobbyist for oil companies.

The present economic situation is in no way comparable to 1986, when plunging oil prices launched a severe recession, shuttering banks, sending housing prices into a tailspin, and generally spreading economic havoc across the state, Bradner said. And while an unexpected plunge in oil prices started the economic chain reaction, another oil-related event caused the turnaround, Bradner said.

“It lasted for a number of years, and frankly, we didn’t emerge from it until the 1989 oil spill, and all the money that Exxon poured into the state to help do the clean up,” he said. “That was the beginning of our recovery.”

Today’s oil price dip is more comparable to a similar situation in 1998, when some members of OPEC began to cheat on production limits set by the organization to keep oil prices artificially high, according to Bradner. In retaliation, Saudi Arabia, the country with the largest oil reserves and cheapest production costs, increased production to artificially lower oil prices, a move calculated to cause pain among other members, where production costs are higher, Bradner said.

When companies face lower returns for the same costs, they takes steps designed to protect their bottom line, including laying off employees, and reducing production.

The 1998 Saudi moves — which eventually sent oil prices down to $8 a barrel — didn’t impact the state the same way the 1986 price plunge did because unlike 1986, the Alaskan economy, was much more diversified in 1998, and much better able to deal with the market fluctuations.

“Our economy barely budged in 1998, because we had a much more diversified economy, we had some cash reserves to help the state budget, and we recovered,” he said.

When the most recent global economic recession hit in 2009, similar conditions prevented a massive impact, Bradner said. The most recent 50 percent decline also occurs after years of declining production among North Slope fields. That’s in part because major oil discoveries on the field are unlikely, Bradner said.

Representatives from various credit agencies, who met with Alaska Governor Bill Walker in New York this month to discuss the state’s finances, said they were pleased to see the state was moving to freeze budget expenditures at $5.5 billion, effectively a decrease in the face of rising costs for state social programs, Bradner said.

Bond agencies were also pleased to see that Walker has ordered departments to prepare budgets reduced by 25 percent, though cuts of that magnitude may be too severe to enact in a single year or even two years, Bradner said.

However, the critical question that went unanswered after the meeting was how the state could further diversify revenue to limit potential impacts from a protracted slump.

“The message that the state people and the governor took away from that is that we had better be thinking about revenue enhancements more than just the gas pipeline,” he said.

The easy cuts include reductions in the capital budget, because the capital budget consists primarily of one-time expenditures, Bradner said. State policymakers face tougher cuts when it comes to the operating budget, where expenditures are recurring and driven by formulas dependent on population, Bradner said.

Prospective replacements include financial windfalls from state investments, tourism, state fisheries, mines, and other proven revenue generators Bradner said. Offshore drilling in the Bering and Chuchki seas holds tremendous potential, but it’s unlikely the state will see much of that revenue, At least one Alaskan company is looking into the possibility of extracting shale oil in Alaska, something that has been successful in the Lower 48.

After his speech, Bradner took several questions, including a pointed question about why experts at the state level didn’t foresee the oil slump.

“A lot of us just were too complacent,” he said. “I don’t want to present myself as an expert in this field. Some of us were concerned that oil production was going down, so we changed the tax code and we solved that problem for a short term, but as to why we didn’t see this, it’s one of these unpredictable out-of-the-blue scenarios. I can’t answer that question.”

“If I could foresee that, I could make a lot of money,” he joked.

Contact Brian O’Connor at 352-2269 or brian.oconnor@frontiersman.com, or on Twitter @reporterbriano.