Alaska revenue picture looking more normal, with lower oil prices, after pandemic and war shocks

After a roller-coaster couple of years, Alaska’s state government revenues are returning to a more normal pattern of dependence on investment earnings, federal contributions and petroleum earnings, Dan Stickel, chief economist of the state Department of Revenue, said on Friday.

The state revenue picture is expected to return to its normal “three-legged stool” pattern in the current fiscal year, to run through June 30, with investment earnings accounting for 33.5%, federal contributions making up 32% and oil-related income making up 27.5%, Stickel said in testimony to the Senate Finance Committee.

That is a change from the previous years, which saw oil prices move from ultra-low levels to last June’s 10-year high, along with investment earnings that veered between a record high in 2021 to the first net losses since 2009.

The COVID-19 pandemic, followed by the war in Ukraine brought havoc to both oil markets and financial markets, and the Alaska treasury has taken the impacts, Stickel told the committee.

He cautioned that those disruptive forces remain and could again upend normal patterns. “We want to stress that we live in an uncertain world,” he said. The recent COVID-19 flare-up in China shows that the pandemic is still causing problems, and ongoing war in Ukraine “speaks to geopolitical uncertainty,” he said.

The bad news about the apparent return to normal patterns for Alaska revenues is the effect of recent months’ downward drift in oil prices. Because of that, the department’s forecast for the current fiscal year’s revenues total $1.1 billion less than what was expected last spring. The price decline prompted the department to reduce projected average oil prices by $12.55 per barrel for the 12 months to end on June 30 than what was predicted in the spring forecast.

In his presentation to the committee, Stickel recapped the price details contained in the department’s most recent semiannual revenue forecast, released on Dec. 15: Alaska North Slope crude oil prices are expected to average $88.45 per barrel for the 12 months that will end on June 30, $81 a barrel for the following 12 months and eventual settle at $75 a barrel by 2032.

Alaska’s budget is sensitive to changes in oil prices. Because of the way the tax system is structured, oil prices have a big effect on total revenues reaped by the state. Depending on price ranges, a $1 shift can mean a revenue difference of $70 million or more, Stickel said.

World events have made it more difficult than normal to forecast oil prices, Stickel explained in his presentation.

“We made the spring forecast right as the Ukraine situation was unfolding, so there was a lot of volatility and uncertainty in the market,” he said. Just as the department had to make big adjustments in its spring oil-price forecasts, more adjustments might have to be made to the newest forecasts, he said.

“We are in a period of historically high volatility. We have been ever since COVID hit. And the forecast here is one most likely case within a wide potential range of outcomes,” he said.

Department of Natural Resources officials on Wednesday made a presentation to the committee on projections for oil production volumes, which they said are expected to remain steady over the next few years.

A new state revenue forecast is expected in March or April, Stickel said.

Alaska has no state personal income tax or state sales tax. Revenues that come from sources other than from investment earnings, federal contributions or petroleum earnings are relatively minor. Those revenues, which include non-oil corporate income taxes, fishery taxes, tourism-related taxes and a variety of other taxes, are expected to amount to only 7% of state revenues for the 12 months to end on June 30, according to department projections.