Alaska’s economy and state budget are based on oil. Due to a steady influx of oil revenues, the state has opted for no income tax and no sales tax.
Not surprisingly, with oil revenues the state’s primary source of income, the recent free-fall in oil prices has not been good to America’s northernmost state, but is this a cautionary tale for North Dakota?
“The state woefully misread the direction of oil prices, predicting they would remain at over $100 per barrel for fiscal 2015,” Politico reported recently. “They are now below $60.”
Because of plunging oil prices, and because the state is so dependent on oil revenues, Moody’s has cut its outlook on Alaska from “stable” to “negative.”
North Dakota, too, is a major beneficiary of oil tax revenues. Could a downturn in the Bakken driven by an oil price rout have the state following Alaska into a budget mess?
With lawmakers set to begin the 2015 legislative session next week, it’s worth noting that Gov. Jack Dalrymple’s budget predicts that oil prices will be much higher than they are currently.
“The budget, which must be approved by state legislators, is based on oil prices of $74 to $78 per barrel for the first year and $79 to $82 per barrel for the second,” reported Reuters of Dalrymlpe’s executive budget last month.
In a recent Bismarck Tribune article, North Dakota commodities trader Eugene Graner suggested that oil prices would remain in the $50 per-barrel range for the rest of this year, and may even be lower this coming fall. After that, Graner doesn’t expect oil to go north of $80 per barrel anytime soon.
Suffice it to say that we’re likely to see oil prices well below what Gov. Dalrymlpe has projected for the rest of this year (the biennium for which Dalrymple has budgeted begins on July 1st). That’s not good.
Even if the trigger doesn’t trigger, lower prices will mean a decline in oil activity. Which will mean a decline in hiring, purchases, etc. While state officials are fond of pointing out that the state’s general fund is only fractionally dependent on oil tax revenues–it only receives about $300 million per biennium in direct oil tax revenues–the impact of declining oil activity would hit state revenue streams almost across the board.
And let’s not forget that the bulk of the state’s oil revenues go into special funds which aren’t accounted for in the state’s general fund. In the current biennium, which ends June 30th, the state budgeted for more than $3.5 billion in spending out of special funds.
“We don’t run the state on oil revenue,” Gov. Dalrymple told the Williston Herald in early December. Doing the math, that’s a little hard to believe.
Alaska made a bad bet on continued high oil prices. Has Dalrymple made a similarly ill-advised bad bet? And will lawmakers follow his lead?
To be fair, North Dakota has maintained the sales tax and the income tax unlike Alaska, though there’s no question that a turndown in oil is going to impact those revenue streams as well.
The “boom” era for North Dakota’s oil fields is over. I don’t think there’s any question about that. The challenge for state policymakers is, what comes next?