The most important question of this election ….

Dollar signANS oil prices, which as most will recall drive 90% of the Alaska state government revenue, fell again Wednesday to $82.16 per barrel.

The current state budget, which already was $1.6 billion in the red when it passed, is predicated on oil prices averaging $105 per barrel.  (The breakeven price for the budget is roughly $117 per barrel.)

Each dollar change in the price of oil is equal to roughly $90 million in state oil revenues.  That means if oil prices for the year settle at $95/barrel, the budget deficit will grow to $2.5 billion, at $90/barrel to something approaching $3 billion, and at $85/barrel to something on the order of $3.4 billion.

Put another way, on a per capita basis (based on the U.S. Census Bureau 2013 population estimate of 735,132), this year’s deficit will be roughly $2,300 per Alaska man, woman and child at $105/barrel, growing to $3,500 at $95/barrel, $4,100 at $90/barrel and $4,600 at $85/barrel.  To put that in context this year’s Permanent Fund Dividend was $1,884.  

After the last two years of record deficit budgets and last year’s (irrevocable) transfer of $3 billion from unrestricted savings to the dedicated PERS/TRS account, Alaska currently has roughly $11 billion (or roughly $15,000 per capita) remaining in unrestricted savings.  If spending and price levels continue at current levels, that will be fully depleted in roughly 6.5 years at $105/barrel oil, 4.2 years at $95/barrel oil, 3.6 years at $90/barrel oil and 3.2 years at $85/barrel oil.

And lower prices don’t just affect one side of state revenues.  Oil investment levels already have started falling globally as projects marginally profitable at higher prices are being deferred at the prospect of lower prices and reduced company cash flows.  While SB 21 has improved Alaska’s competitive position, it remains to be seen whether it will be enough to withstand the challenges of a significantly lower oil price outlook going forward.  If current oil prices persist, some, and perhaps significant, deferments — with a consequential effect on projected North Slope production levels — should be expected.

Alaska is not alone in this situation.  Other global oil states face similar challenges.

But because of the levels to which Alaska has increased spending over the last four years, Alaska is at the upper end of those exposed.  As noted above, Alaska’s current breakeven budget price is $117/barrel.  According to the New York Timesthat compares with $140 for Iran and $120 for Venezuela, and roughly the same price for Russia as Alaska.  But other nations, such as Saudi Arabia, Kuwait and Oman, who have greater influence over global prices have lower — and in some cases, significantly lower — breakeven price levels.

Some are predicting that prices in the range of $90/barrel, near the current Saudi breakeven price, may become the new normal as Saudi continues to hold prices lower in order to retain market share among flattening demand and increasing world supplies.  Others are predicting that lower price levels, in the range of $80/barrel, may be possible.  Regardless of the precise level, however, all indications currently are that significantly lower prices than those that have existed over the last few years are likely to persist for an extended period.

That will have a significant impact on Alaska.  For example, in the real world the question on the table this coming legislative session about education won’t be whether to increase current funding levels.  Instead, the real world question will be how much — and where — to cut.  Same for Medicaid, the Knik Arm Bridge, the Juneau access road, the Susitna-Watana dam, “Roads to Resources” and likely, even the Alaska LNG project.

That suggests the key question which voters should be asking themselves this coming election — and which the various gubernatorial and legislative campaigns, most talk radio hosts, Great Alaska Schools and other similar groups should be talking about — is which candidates are best positioned to handle the coming fiscal challenges facing the state.

Personally, I would suggest that it is not the same crew who over the last four years have enacted and signed the four largest budgets in state history, produced the two largest budget deficits in state history and drained in two short years over a third of the state’s unrestricted savings.  Instead, I would suggest that the better answer lies among those candidates who have talked — and as importantly, thought — about fiscal responsibility from the beginning of the campaign.

While others may disagree on which candidates have better answers, however, at least that is the question they should be asking the candidates, themselves and talking about with others in the final two and a half weeks of the campaign.

In the real world, Alaska, as with other oil driven states, is turning a page.  The most important question of this election is who is best prepared for the next chapter.

Alaskans can handle the truth, even if some are in denial …

Screenshot 2014-10-12 16.48.51Earlier this week, as part of the “It’s Our Future” campaign, we started running web ads that asserted simply, and correctly, that if those legislators who have voted for state budgets since 2012 are “allowed to continue spending Alaska’s money at the rate we are on, you can kiss the #PFD goodbye.”

We made equally clear that, in casting votes to continue spending far in excess of sustainable levels, those same legislators necessarily are “eyeing” the Permanent Fund earnings because, as the state’s best economic analysts have made clear there will be nowhere else for the state to turn to for revenues at a point in the not too distant future .

The reaction by some has been humorous, in a Greek tragedy sort of way.  Rather than deal with the statement on the merits, a few have resorted instead with variations of “you lie.”  I suppose when you don’t have the facts on your side that’s about the best you can do. Continue reading

Bill Walker: “I will … put in place a sustainable budget.”

Web Note 14 Fiscal Burden_Page_01

Click above to read ISER Web Note 14.

Two years ago the University of Alaska – Anchorage Institute of Social and Economic Research (ISER), the state’s best economic think tank, said this:  “Right now, the state is on a path it can’t sustain. … Reasonable assumptions … suggest we do not have enough cash in reserves to avoid a severe fiscal crunch soon after 2023, and with that fiscal crisis will come an economic crash.”

ISER also offered a solution.  “What can the state do to avoid a major fiscal and economic crisis? The answer is to save more and restrict the rate of spending growth. All revenues above the sustainable spending level of $5.5 … would be channeled into savings.” Continue reading

Guest Column: Care Clift, the Alaska Libertarian Party Candidate for Governor

Publisher’s Note:  This is the second in a continuing series of guest columns by various state-level candidates who are focusing in this election cycle on the issues relevant to this blog — Alaska oil, gas and fiscal policy.  The first was by Alaska Constitution Party candidate for Governor J.R. Myers, and is available here.  The following is from the Alaska Libertarian Party candidate for Governor, Care Clift (website, Facebook).  The reason for publishing these pieces is explained in greater detail in the preamble to the previous piece from J.R. Myers. Continue reading

A Pretty Big Deal (… and an important event)

Alaska’s fiscal dilemma in a nutshell (and an opportunity to learn a lot more about it) ….  To learn more about the event, click here.

Guest column from Daniel Hamm, President, Alaska Republican Assemly

Publisher’s Note:  In a 2010 editorial the Wall St. Journal had this to say looking back at the 2006 loss by Republicans of the U.S. House of Representatives:  “It isn’t easy to spend so much money so egregiously that even Nancy Pelosi could campaign as a relative fiscal conservative, but the Tom DeLay Republicans managed the feat in 2006.”  Daniel Hamm writes below about seeing the same in this year’s Alaska legislative races. Continue reading

Damn market economics …

Please god ...While it has happened occasionally since prices recovered from their 2008 crash lows, Monday was the first time in awhile that ANS oil prices have fallen below $100/barrel. The occasion seemed an appropriate time to check in on where price forecasts are headed generally in the current market environment. Continue reading

The revised candidate questionnaire …

QuestionnaireYesterday morning I received a call from Amanda Coyne asking for a response to concerns she was hearing from incumbent legislators that one of the questions on the questionnaire I had forward to all candidates last week put them in a difficult position.  The reason for and a link to the initial questionnaire is here. Continue reading

Keithley lays out Independent Expenditure effort …

Fiscal CliffMy appreciation to the Alaska Dispatch News (here) and Juneau Empire (here) for running the following op-ed piece. Each used different titles.  The title above is the one I used when I wrote and submitted it.  For background, the release announcing my Independent Expenditure effort is here; the candidate questionnaire I sent out this week is here.

BY BRAD KEITHLEY

Earlier this month I announced that I intend to spend up to $200,000 this coming fall in certain key legislative races.  The reason I am doing that is simple. Continue reading

The Keithley Survey – Accountability in the State Legislature

APE-Government-Spending-610x406A column from Alaska Politics & Elections …

Earlier this month I announced that I intend to spend up to $200,000 of my own money in an independent expenditure effort this fall directed at 3 – 5 legislative races. A copy of the initial press statement outlining the effort is here. Continue reading