Alaska is feeling the pinch from an extended slump in crude oil prices.
The budget of the northernmost U.S. state has been dramatically impacted by the slump in crude from over $100 to around $40 a barrel in the last year and change. The government of Alaska has already taken several cost cutting measures, and is now looking at scaling back subsidies that encourage exploration and production by energy firms that have mushroomed over the last couple of years.
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Digging into the numbers, the state of Alaska returns over $1 billion a year in tax credits and rebates to oil firms and their financial backers, resulting in what once was a source of income becoming another hole in the budget. Budget figures show the state has seen a net loss of $263 million on its oil production tax program over the last 12 months.
A number of well known oil and gas firms including ConocoPhillips, Exxon Mobil and BP have enjoyed these generous tax breaks for many years. The state first implemented the oil exploration tax breaks them around two decades ago to halt a decline in production. Moreover, Alaska had boosted the subsidies not long ago as the shale oil boom increasingly lured drillers to North Dakota and away from Alaska. T
Industry analysts highlight that the current Alaska subsidies to oil companies are payments that often cover up to 85% of the costs of a well. Not surprisingly, these generous subsidies have notably boosted oil exploration-and-production in the state, but the cost of the tax breaks began peaking just as oil prices slumped to long-term lows 15 months ago.
More on Alaska cutting oil subsidies
According to Alaska Governor Bill Walker, the tax subsidy program “began for all the right reasons, and it’s reached a point beyond our fiscal appetite.” As he noted in a recent interview. “We can no longer subsidize exploration.”
Several U.S. state governments and dozens of national governments across the globe are facing budget crises due to the now long-term decline in the price of crude oil and natural gas.
Alaska is being hit especially hard due to its dependence on the oil industry. Tax revenues related to energy represent 90% of the state budget, and has led to large “oil dividend” checks to every Alaskan ($2,072 a person in 2015). The new plan announced Wednesday by the Walker administration would completely revamp Alaska’s oil fund, modeling it after the sovereign-wealth funds of other nations. Experts note this could result in the popular Alaskan “oil dividend” being cut in half.
Although Walker has not announced specifics for the planned changes to the oil exploration tax breaks, the beleaguered oil and gas industry is very worried. Smaller local firms as well as wildcatters from all across globe have recently joined the rush to explore Alaska, and many say it was the tax breaks that led to their interest.
Gunnar Knapp, an economist at the University of Alaska Anchorage, says the state has little choice but to focus on its immediate financial problems: “In the short term…we’re scrambling for cash,” he said. “We are in a major fiscal crisis.”
The state’s income has fallen precipitously along with global oil prices that have come down close to 60% from the highs of last summer. Alaska state officials have already had to withdraw from savings, reduce funding for schools, police and roads, and even limit health-care spending to make up for a $3 billion deficit this year.
As noted above, the Walker administration is also moving toward long-term changes such as for lower tax breaks and a probable reduction in the state’s cherished oil dividend.