This commentary was originally published in AK Memo.
After a muted initial reaction to Trump kicking off a war with Iran, oil prices soared to nearly $120 a barrel in early trading on Monday amid fears that it was going to be a protracted, directionless conflict.
Then, on the word that the president did, in fact, have a plan, prices “crashed” back down into the $80 range by the end of the day.
And then, by Tuesday afternoon, prices started creeping back up when it turned out a Trump administration claim about the Navy escorting a tanker through the Strait of Hormuz was not only false, but that Iran was in the process of placing naval mines in the critical shipping corridor.
Since Trump attacked Iran, Alaska’s outlook has gone from a tepid nothingburger to looking like a repeat of 2022 — when the state was buoyed by booming oil prices stemming from Russia’s attack on Ukraine that paid for a big PFD just in time for Gov. Mike Dunleavy to ride the $3,000+ cash payment to a second term — to the possibility of something more existentially and economically devastating like the 1970s energy crisis, then back to a moderate bump that won’t greatly change legislators’ budget calculus, to … who even knows.
The roller coaster ride of oil prices over the last few days — which has at least one lawmaker already calling for a full dividend — has been about as good an illustration as any as to why most legislators and budgeters are exercising caution.
“A lot of the excitement — certainly not supportive,” said Senate President Gary Stevens, R-Kodiak, at last week’s press conference, illustrating the uncomfortable push and pull of Alaska’s financial situation, where real-world human suffering often translates to real-world bucks in the state’s treasury.
“I mean, we’re concerned about what’s going on in the Middle East, and the deaths that have occurred and the destruction that has occurred, but one of the benefits is that there should be some higher oil prices.”
At the same meeting, Anchorage Sen. Bill Wielechowski outlined that every dollar above or below the state’s revenue forecast for oil prices translates into about $30 million in revenue, but that’s based on the yearlong average. Daily price fluctuations, he explained, translate to more like $82,000 in daily revenue per dollar price difference, or $820,000 for every $10.
That’s all to say it’ll take a lot more high days than we’ve seen to cover the current year’s roughly $500 million deficit — a hole that was planned to be filled by tapping the Constitutional Budget Reserve (a three-quarter vote minority Republicans have not been willing to give). Let alone cover the price of a full dividend.
Legislative Finance Division Director Alexei Painter told House Finance last week that oil would have to average more than $105 per barrel through the end of June to fully fund the supplemental budget, which covers things like disaster response, highway projects and the interminably expensive prison system.
“Barring extraordinary events beyond what we’ve seen already, I wouldn’t anticipate a high likelihood that we will be able to cover all the supplemental requests without tapping the Constitutional Budget Reserve,” he said.
Oil prices went from $78 per barrel on the day he made those comments to $81.72 to $94.08 by Friday, the last day available for Alaska’s crude oil prices.
To be clear, those prices are all well above the current revenue forecasts, which expect an average of $65 per barrel of oil this year and $62 next year, but alone aren’t enough to meaningfully move the dial on the state’s deficits.
Still, we’re at a time where legislators are coming face-to-face with the consequences of years of pinching pennies. After all, the dire situation at state boarding school Mt. Edgecumbe, which included slashing live-in volunteers who took students on walks and trips into town, was all over a $1.5 million shortfall.
And while the uptick in revenue will take the pressure off legislators’ need to address the state’s structural budget deficit for another year, as it did in 2022, it’s a reminder of why they desperately need to address the precarious position Alaska leaves itself in by relying so much on oil revenue.
Roller coasters, after all, are a mix of high highs, free falls and ejector airtime.
And with the notoriously mercurial Trump administration, things are even more unpredictable. Who knows how long it’ll last, where it’ll take us or if we’ll even make it in one piece.
Take, for example, U.S. Energy Secretary Chris Wright’s claim that the U.S. Navy had gotten into the business of escorting tankers — seemingly an effort to soothe fears over the economic fallout — before the White House finally stepped in to say that no such thing had happened. The whole thing resulted in a roughly $10 dip in oil prices, with prices rebounding to the $90 range at the correction.
That’s a difference of $820,000 to the state treasury right there, about half of Mt. Edgecumbe High School’s deficit.
The political component of Trump’s war on Iran adds an extra layer of uncertainty to already uncertain oil and gas markets, particularly as the economic impacts of increasingly expensive gas are felt by Americans. It’s why the administration has been so quick to downplay or soften — if only in headlines — the war’s impact.
That kind of economic anxiety is precisely what Trump and his allies successfully manipulated heading into the 2024 election, and I’d hazard a guess it’s not exactly the sort of thing Republicans like U.S. Sen. Dan Sullivan and U.S. Rep. Nick Begich are thrilled about running on this year. That political risk — amounting to yet another existential threat to Republican rule in 2026 — is probably the greatest reason to not get overly excited about a protracted conflict with Iran.
Well, that, and the human suffering.