Every year, the State legislature faces the question of what it can afford to spend. On one side of the equation is what services they feel the residents need. On the other side is how much money they expect to raise.

In terms of discretionary spending, the largest source of revenue comes from the oil industry. However, oil revenues are very volatile. And so, State revenues swing wildly from year to year. This makes it very difficult to know how much money the State has to spend.

Right now, the only source of information that the legislature has to help them budget comes from the Department of Revenue. Unfortunately, that source of information is not always reliable. It often misses the mark on oil prices, usually to the low side. And it usually misses on production forecasts in the other direction. All told, its forecasts are barely better than dart throwing chimps.

Part of the problem comes from the nature of the issue. Oil prices are probably impossible to forecast accurately. But when volatility undermines your ability to see the future, it doesn’t mean you give up. Rather than trying to build a better telescope to see through the fog, you need a better sonar system to understand what threats may exist.

That is what we are trying to do here. We aren’t trying to tell you what the future will look like. We are trying to show you the risk to which the State is exposed. By understanding those risks, you can plan around them.

Royalty and Production Tax Revenue Forecast (as of 8/16/18)

This forecast is generated by combining our oil price forecast and oil production forecast to generate a gross revenue forecast. These numbers are updated every week based on the newest information available. From there, we run those numbers through Alaska’s tax system.

Of course, all of our forecasts rely on a suite of assumptions. Therefore, our model will be updated as we have the opportunity to improve those assumptions. We use an industry best practice when it comes to modeling. That is, we start with the simplest model construction, perform a sensitivity analysis to the inputs, and improve the model assumptions based on the best value of information.

This is our first pass, so there is still a lot of uncertainty built into the model. Over the course of the next few years, refinements will improve the results (if anyone is interested in speeding this process up, some money to focus on this effort would help).

Here is what our model is saying so far:

FY19 Low Mean High
Oil Price (Destination)  $            64.01  $           74.69  $          85.35
Oil Production (BOPD)            481,324           503,446          525,684
PF Royalties (billions)  $            0.385  $           0.464  $          0.543
UGF Royalties and Taxes (billions)  $            1.284  $           2.002  $          2.906
FY20 Low Mean High
Oil Price (Destination)  $            52.15  $           75.05  $          97.69
Oil Production (BOPD)            487,634           525,878          564,792
PF Royalties (billions)  $            0.312  $           0.487  $          0.659
UGF Royalties and Taxes (billions)  $            1.012  $           2.274  $          3.977
Oil Price Detail Low Mean High
Jul-18  $           76.19
Aug-18  $            72.14  $           73.58  $          75.03
Sep-18  $            67.52  $           73.78  $          80.02
Oct-18  $            65.10  $           73.97  $          82.80
Nov-18  $            63.28  $           74.15  $          85.14
Dec-18  $            61.34  $           74.35  $          87.19
Jan-19  $            60.21  $           74.54  $          89.08
Feb-19  $            58.69  $           74.75  $          91.08
Mar-19  $            57.42  $           74.96  $          92.32
Apr-19  $            56.45  $           75.14  $          93.91
May-19  $            55.48  $           75.36  $          95.31
Jun-19  $            54.41  $           75.57  $          96.52
FY19 Average  $            64.01  $           74.69  $         85.35
Oil Production Detail Low Mean High
Jul-18           415,485
Aug-18            426,844           438,800          451,043
Sep-18            435,541           469,338          504,216
Oct-18            466,654           503,682          542,060
Nov-18            475,511           514,279          553,859
Dec-18            482,317           522,957          565,038
Jan-19            483,044           523,189          564,725
Feb-19            486,223           528,266          571,487
Mar-19            502,471           545,973          590,979
Apr-19            490,581           533,850          578,246
May-19            489,742           533,171          577,773
Jun-19            470,642           512,361          555,993
FY19 Average           481,324          503,446         525,684
Oil Price Detail Low Mean High
Jul-19  $            53.44  $           75.78  $          97.88
Aug-19  $            52.60  $           75.96  $          99.32
Sep-19  $            51.78  $           76.17  $        100.28
Oct-19  $            51.18  $           76.36  $        101.56
Nov-19  $            50.52  $           76.56  $        102.95
Dec-19  $            49.85  $           76.77  $        103.98
Jan-20  $            49.20  $           76.97  $        104.81
Feb-20  $            48.61  $           77.18  $        105.52
Mar-20  $            47.99  $           77.39  $        106.77
Apr-20  $            47.20  $           77.59  $        108.05
May-20  $            46.64  $           77.80  $        109.09
Jun-20  $            46.16  $           78.00  $        109.92
FY20 Average  $            52.15  $           75.05  $         97.69
Oil Production Detail Low Mean High
Jul-19            443,947           483,565          524,359
Aug-19            432,928           472,170          512,575
Sep-19            472,216           515,883          561,433
Oct-19            492,666           540,841          589,823
Nov-19            501,358           550,587          601,986
Dec-19            507,754           558,455          610,866
Jan-20            492,486           542,592          594,099
Feb-20            489,190           541,291          595,649
Mar-20            490,055           542,530          596,164
Apr-20            478,361           530,694          585,720
May-20            477,894           530,058          583,889
Jun-20            452,354           501,874          552,888
 FY20 Average            487,634          525,878         487,634