Riding the Oil Wave

President John F. Kennedy once said, “Change is the law of life. And those who look only to the past or present are certain to miss the future.” After enduring a two-year oil price downturn, and thousands of job losses in the oil and gas industry, Alaska is certainly looking for a change and earnestly towards the future.

In fact, our future could be getting brighter according to the U.S. Energy Information Administration, which today released its Short-Term Energy Outlook (STEO) for January. According to the EIA’s STEO, North Sea Brent and West Texas Intermediate (WTI) oil prices are forecasted to average $53 and $52 per barrel, respectively, in 2017. In 2018 the EIA thinks prices for these benchmarks will hit $56 and $55 per barrel, respectively. Following the major OPEC deal and continued strong world demand, the EIA believes prices for Brent crude will end up at $59 per barrel by the end of 2018.

Any increase in oil prices is tremendous news for Alaska. When oil prices climb higher the state’s budget deficit shrinks, production becomes more economical, companies increase spending and hire more Alaskans, and companies begin progressing more rapidly on projects in the development stage. If they have a stable fiscal climate.

Even with low prices, the Alaska Department of Revenue’s Fall 2016 Revenue Sources Book estimates that over the next 10 years petroleum revenue will account for roughly 70% of the state’s unrestricted general fund (UGF) income. Unlike the Spring 2016 Revenue Sources Book, the state’s oil price projections in the Fall Revenue Sources Book are more in line with the EIA’s. However, the production estimates put forth by the administration have given Headlamp and others concern. With lower levels of projected (instead of actual) production comes a larger budget deficit.

As Alaska climbs out of this price crash, which saw oil dip to the mid $20 per barrel range, policy makers must approach the industry from a long-term perspective. This year marks the 40th anniversary since Prudhoe Bay begin production, and oil began flowing down TAPS. Policy makers should be focused on providing Alaska’s next generation another 40 years of opportunity in Alaska’s oil, gas and mining.

The future for oil prices and subsequently Alaska’s economy could be like The Beatles song “Getting Better All the Time,” if policy makers make the right decisions in 2017. Market conditions have turned the corner – the ball is the hands of decisions makers now.