Legislators cautious of overreliance on high oil prices

Kiehl: History shows us that with high oil prices comes (budgetary) giddiness

In a break from past practice, the Alaska Department of Revenue this year will provide monthly updates to legislators whenever projected oil prices — and state revenues — move up or down more than 10%.

Several legislators worry that could confuse budget deliberations this session.

Revenue staff has updated the state’s twice-yearly oil-price forecasts internally but not released the numbers to the public, the department’s chief economist Dan Stickel told the Senate Finance Committee on Jan. 20.

“We’ve decided to go ahead and start releasing them publicly,” he said.

The department’s annual December revenue forecast and Jan. 19 update reported that high oil prices of recent months, and expectations of high prices for at least the next year, would produce $2 billion more in tax and royalty revenues for the state treasury for fiscal years 2022 and 2023 than the department had forecast last spring.

With oil around $80 per barrel, every additional $1 boost in the price for a full year would add about $80 million to the state general fund, according to the state’s estimates — or drive revenues in the other direction if prices drop.


Legislators, however, are cautious about counting too much on high prices to last. And they are concerned that monthly updates of projected state revenues could provide an excuse for advocates of higher state spending.

“History shows us that with high oil prices comes (budgetary) giddiness,” said Juneau Sen. Jesse Kiehl.

The additional dollars from high prices could add to political pressure for lawmakers to appropriate a substantially larger Permanent Fund dividend this year, Kiehl said. Boosting the size of the dividend is a big piece of Gov. Mike Dunleavy’s spending plan and has been a major political theme for the governor, who is running for reelection.

A majority of lawmakers have resisted Dunleavy’s calls for bigger PFDs the past three years, arguing against overspending the Permanent Fund for short-term political gains, while arguing for building up savings and filling gaps in public services such as education.

Besides adding to pressure for spending on a larger dividend, the proliferation of oil-price and oil-revenue forecasts with monthly updates could make it harder for legislators to agree on a spending plan for the fiscal year that starts July 1, said Senate Finance Committee Co-Chair Bert Stedman, of Sitka.

The House Finance Committee, Senate Finance Committee and governor’s Office of Management and Budget could be using different numbers, Stedman said last Friday. All of the players at the budget table need to agree on the same revenue numbers, “and then we live with that within the budget.”

Otherwise, “we’ll feel like a yo-yo,” he said.

Higher monthly revenue estimates risk some lawmakers justifying more spending, particularly on the politically popular public works budget and dividends, Stedman said.

Though most of the state’s general fund dollars come from the annual draw on Permanent Fund earnings, oil is the most volatile of Alaska’s revenue streams, and high prices can provide a substantial boost to the treasury.

Stedman would prefer legislators start work on the budget based on revenue numbers from the department’s December forecast, and then update their numbers when the spring forecast comes out in April. The Senate Finance Committee “will have to think how we want to lock in a price for the budget (deliberations),” he said.

And even if the revenue department’s monthly update shows projections of higher tax and royalty receipts next year, the state cannot “bank on forecast oil prices,” said Ketchikan Rep. Dan Ortiz, a member of the House Finance Committee.

Ortiz said he is nervous about moving forward on the budget under the assumption that current oil prices will remain elevated. Markets have not been this high since 2014.

“Oil has and will always fluctuate,” he said.