Here is your monthly update on some of the things that impacted Alaska’s finances and economy.
The Legislature Gaveled In on January 21st
The primary responsibility of the legislature is to appropriate the money needed to run the state government. Unlike last year, the House Finance Committee got right to work.
The subcommittees are currently debating the merits of the Governor’s proposal – which calls for a $1.5 billion draw from savings to balance the budget after paying the statutory PFD. With only $2 billion in the state’s constitutional budget reserve, it will be interesting to see how things shake out.
I don’t expect major changes to the agency operations, as the governor’s proposal is mostly flat funding. However, my guess is that you should not expect to get the $3,100 PFD the calculation calls for. It is far more likely we get something closer to $1,000 – or a little more if it is combined with a change to the law.
The biggest pieces of legislation will likely be a proposal to change the PFD calculation and the potential to adjust oil taxes.
The “Fair Share Act” will be on the Ballot
The citizen’s initiative to increase oil taxes turned in 44,624 signatures just before the legislative session began. So long as at least 28,501 are valid, the initiative will go on the ballot.
Article 11, Section 4 of the constitution lays out the process:
“An initiative petition may be filed at any time. The lieutenant governor shall prepare a ballot title and proposition summarizing the proposed law, and shall place them on the ballot for the first statewide election held more than one hundred twenty days after adjournment of the legislative session following the filing. If, before the election, substantially the same measure has been enacted, the petition is void.”
Alaska Constitution
To get on the primary ballot, the legislature would have to adjourn before April 20th (August 18th minus 120 days). If not, it will show up on the general election ballot in November (unless there is a different statewide election before then).
The last oil tax issue on the ballot occurred in 2014, which failed by a vote of 89,608 to 99,855 at a time of record high oil and gas employment, full PFDs, record high budgets, and no talk of personal taxes. If that outcome is reflective of the 2020 vote, just 2.7% of the population would need to swing in favor of higher oil taxes for it to pass.
In the current financial climate of the state, I put the odds of this initiative becoming law fairly high.
Oil Prices Were Volatile
January 2020 saw prices jump around a bit, topping out at $70.73 and falling as low at $59.72. The month ended up averaging $65.49 – pulling the fiscal year to date average up to $64.45.
The year started off with an airstrike in Iraq, killing an Iranian militia leader. The action sparked some concerns about escalation and inserted a fear premium into the oil market. It didn’t last long. Prices returned to normal levels within a week.
Further supply disruptions occurred during the month, including protesters shutting down a field in Iraq and the militant forces in Libya closing oil exports as a tactic to gain leverage in ceasefire talks.
But, the trend of bearish news continues to weigh down trader’s enthusiasm, resulting in almost any bullish sentiment being shrugged off. Even with the geopolitical tensions and over a million barrels of oil per day being removed from the market, prices barely budged.
Instead, oil trended downward during the penultimate week of the month as all eyes turned toward the spread of the Coronavirus in China. While it isn’t immediately obvious how Chinese public health and oil markets are related, the quarantine that resulted dramatically dented the use of fuel. Traders are now trying to determine how the disease will progress and how long the demand reduction will last. But, over two million barrels per day of demand may be missing during the next several weeks.
This comes on top of the anticipated additions of supply from Guyana and Norway into an already crowded market. Consequently, all signs point to a continued oversupply for the next few months. It is unlikely for prices to pierce the pessimism until at least the summer.
However, oil prices might get some support as OPEC discusses further reductions to balance the market. Their next meeting is scheduled for early March, by may be moved up to February. And, as soon as the situation in China is under control, ANS prices should return to the $65-$70 per barrel range. But, if the disease causes a prolonged reduction in transportation, prices could easily fall below $50.
With the reduced month-end prices weighing down expectations moving forward, our forecast for FY20 faces a downward revision of $1.66. We are now projecting the year to end with an average price of $64.72 +/- $5.75. If things get worse, another downward revision will follow.
North Slope Production is Steady
The official production numbers from AOGCC show that December averaged 524,913 barrels per day from the North Slope. That is on par with the 525,749 barrels per day in November. However, production was 1.9% below last December’s production.
Preliminary January numbers indicate things stayed flat this month. We expect production to hold steady for the next three months, and then start falling as the summer maintenance cycle begins.
Our forecast model is now suggesting an annual average of 498,803 +/- 7,500 barrels per day in FY20.
Alaska’s Economy Continues to Grow
According to Department of Labor data, Alaska saw its jobs count in December 2019 up 1,900 over the prior year. All regions in the state were above previous year job counts, with the biggest gains in Anchorage showing +700 and the Northern region posting +500.
The state’s unemployment rate maintained its record low at 6.1%. Unadjusted unemployment rates are comparatively low in the urban centers, including:
- Anchorage 4.8%
- Fairbanks 5.3%
- Juneau 4.4%
Data also show that Alaska’s population fell by 3,048 people (-0.4%) between July 2018 and June 2019. However, the reduction in people is not matched by a reduction in economic activity. Jobs counts increased, income is up 3.4% over last year, and GDP continues to trend upward.
Losing population while gaining income results in a higher income per capita. This means our economy is not only stable, our residents’ lives are improving – as expected. This trend should continue through the rest of FY20, although it will slow down when the Hilcorp/BP transaction is completed in a few months.
Investment Earnings Impressed
The Alaska Permanent Fund Corporation reports earning $1.2 billion in December 2019. The fund has now earned a total of $3.4 billion during the fiscal year.
With $2.9 billion in withdraws, the fund has already grown by $500 million in FY20, with six months to go. Another $700 million of interest, dividends, and lease payments are expected before the end of the fiscal year, plus whatever change in value our assets see. There have also been $175 million in royalty deposits to the principal account so far this year.
The Fund now stands at $67 billion, of which $7.5 billion is accessible, uncommitted, and in spendable form (in addition to the anticipated transfer of $3.1 billion in FY21). This number would be higher, but over $1.2 billion of the gains this year have not been realized yet.