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Alaska's big oil forecast question: Where did the billions go?

Dermot Cole

FAIRBANKS -- A year ago the Parnell administration predicted that oil tax revenue in fiscal year 2015 would be $3.4 billion. Last week the state predicted that oil tax revenue in fiscal year 2015 would collapse to $1.7 billion.

Oil tax revenue in fiscal year 2015 is now expected to be about half of what it was in fiscal year 2013.

What happened?

A projected decline of $7 a barrel in the price of oil, a continued decline in production, the passage of the oil-tax cut and increases in transportation and development costs are all cited as reasons.

There is a larger issue here that again points to a serious flaw in the creation of the new oil tax law.

The most-troubling element is that a possible revenue collapse did not emerge as a central issue during the multi-year debate over oil taxes. The focus was entirely on what it would take in terms of new production to yield the same revenue as under the old tax system.

Hindsight provides a lesson: The Parnell administration and the ruling GOP majorities in the Legislature did not investigate or explain the chance that relatively minor changes in key variables could lead to a enormous drop in state revenue. Not to say that anyone could have predicted the exact price and volume of oil, but a range of probabilities should have been attached to every prediction uttered with such confidence by administration officials and consultants.

These are what Donald Rumsfeld would have called known unknowns, as opposed to unknown unknowns. The variables are not Acts of God or possibilities so unlikely they're easily ignored. I can understand why the state did not examine what might happen if oil prices dropped by $100. But I don’t understand why the state did not accurately model what might happen if oil prices dropped to $100.

The new long-range forecast calls for a magnified budget impact with enormous implications for our future.

A year ago the state said that production taxes from 2014 to 2022 would total close to $32 billion. Last week the state said the total over those years would be closer to $18 billion.

There is no evidence that this new scenario was among those studied by the Legislature before it enacted the tax-cut law.

Supporters of the tax cut -- who now say there's no need to worry and that SB 21 wasn’t really a tax cut at all -- didn’t say that back in the ancient past.  How ancient?  Try March and April of 2013. No more than nine months ago.

In early 2012, the Department of Revenue released a report saying that under Alaska’s Clear and Equitable Share, the average tax on oil at $100 a barrel was $29. The department said this was more than triple the tax under the old Economic Limit Factor or ELF system. The ELF tax would be $8.50 at $100 per barrel, the department said.

Last week the department forecast said the tax per barrel for fiscal year 2015 is expected to drop to $10.80, with oil at $105. That’s close to ELF territory.

The new forecast and the budget that Gov. Sean Parnell is to release Thursday will lead to a question that dominated Alaska budget discussions in the 1990s and the early part of this century: When will the Constitutional Budget Reserve (CBR) run dry?

The reserve, a savings account that now contains around $11.6 billion, was never expected to live this long. When oil was in the low double digits, it was used to balance the budget.

Then came the enactment of the ACES tax during the Palin administration and the deposit of billions that replenished the account when oil prices spiked well above $100.

It’s been years since the death watch for the CBR has been a current topic, but it will likely be back in front of us within a couple of years after the $5.6 billion Statutory Budget Reserve is exhausted.

Alaska has enough savings to last for several years, but the flexibility or the political ability to invest billions in major projects without dipping into the Alaska Permanent Fund may soon be gone, if it isn’t already.

Dermot Cole can be reached at dermot@alaskadispatch.com. Follow him on Twitter at @DermotMCole