Alaska lowers oil price forecast, expects deficit

ANCHORAGE, Alaska (Reuters) - Alaska revenue officials said on Tuesday they have lowered their expectations for North Slope crude oil prices and are expecting a much bigger budget deficit than earlier estimated.

Prices for Alaska North Slope crude are expected to average $63.28 a barrel for the current fiscal year, according to the new forecast released by the state Department of Revenue. That is a substantial decrease from the $77.66-a-barrel average price that the department forecast in December.

The revised forecast combines expected oil prices of roughly $40 a barrel over the second half of the fiscal year with the extremely high prices experienced several months ago. Prices for North Slope crude peaked in July at $144 a barrel. Alaska’s fiscal year ends June 30.

Production for the current fiscal year is expected to average 686,000 barrels a day, according to the new forecast. That is 3,000 barrels a day less than what was predicted in December.

With oil revenues accounting for nearly 90 percent of state general revenue, the new oil price forecast translates to a significant drop in money expected to flow into the treasury.

The budget deficit that was expected in December to amass to $450 million by the end of the fiscal year is now expected to be $1.2 billion more than that, Department of Revenue officials said.

In a statement, Gov. Sarah Palin said she plans $286.6 million in spending reductions in response to the drop in the price of oil but that legislators will probably have to authorize the spending of well over $1 billion in savings to make the current year’s budget balance.

“The more we reduce now, the less we will have to draw from savings at the end of the year,” Palin said in her statement. “With the drop in oil prices, it will require reductions in the budget and access to reserves to keep Alaskans employed and the economy moving.”

The current fiscal year’s budget authorized about $6 billion in spending, plus $1.17 billion that was allocated to various savings funds, for a total of $7.17 billion, the Republican governor said.

Legislative leaders, at a news conference in the state capitol in Juneau, said the expected $1.65 budget shortfall is serious and that the problem will get worse in fiscal 2010. But they said price volatility is a reason they socked money away in savings accounts when they could.

“When we have more money on the table we don’t go and bloat up government. And the revenue stream is a rollercoaster. In the years that we have surpluses, we put it aside. In the years that we don’t, we need to tighten our belts,” Sen. Lyman Hoffman, a Democrat, co-chairman of the Senate Finance Committee, said at the news conference.

“At this stage, I don’t think there that would be any major reductions in the operating budget, but use the revenues that we’ve set aside to level things out. The state operating budget should not be an up-and-down situation depending on what the price of oil is,” Hoffman said.

“We can’t overreact and slash and burn the operating account, or we’ll push the state into a recession,” said Sen. Bert Stedman, a Republican, Hoffman’s co-chairman at the finance committee.

Editing by Christian Wiessner