If there's one thing we've learned in Alaska over the past year and a half, it's that we can count on oil prices to change.
I say that before daring to mention that if by some chance oil stays near $30 or $35 a barrel for the next couple of years, we could reach an unprecedented moment in modern Alaska history — net revenues from oil could drop to zero or close to it.
This week the world price jumped a bit on rumors that Russia and Saudi Arabia might conspire to trim production, desperate as they are for more cash.
Alaskans recognize the dilemma and the desire for more dollars per barrel, living in one of the most heavily oil-dependent regions in the world. While the oft-repeated claim that we rely on oil for "90 percent of the state budget" has been out of date for years, that is mainly because oil has dropped so far, so fast.
I don't think Alaska oil revenue will drop to zero, but we should recognize the combined net revenue from the production tax, corporate income tax, royalties and property tax could be more than offset by hundreds of millions in tax credits if prices stay near $30 or $35 a barrel.
A zero return on oil is unlikely because more lawmakers are starting to see oil company tax credits as an easy target for hundreds of millions in budget cuts, especially if oil prices don't double from the current level.
We are in this situation mainly because oil prices have dropped by more than $80 a barrel over the past year and a half. A smaller factor is the structure of the net profits oil tax system. When net profits vanish, so do the taxes. When operating costs are $35 a barrel and the price is $35 a barrel, nothing remains.
This does not mean that there is no profit from refining and marketing Alaska oil in the Lower 48, segments of the industry that are not part of the state tax picture and an important revenue source for BP and ExxonMobil, but not for ConocoPhillips.
The oil tax law does have a minimum gross tax designed to prevent production taxes from dropping to zero, but there is a hole in that floor that has grown bigger the more the price drops.
If oil prices stay below operating costs for the big companies this year and next, the companies could use a provision in the law to carry forward those losses and pay no production tax.
A similar drastic drop would have happened under the old ACES system and we would have gone to zero sooner through the application of other credit provisions. But there were repeated warnings the gross floor tax needed to be changed, statements that drew little attention from the Parnell administration and the Legislature before and after the passage of SB 21.
State revenue officials predict that at prolonged prices of $40 and below, production taxes will drop to zero next year, a drop of about $171 million, compared to what oil would generate at $56 a barrel.
In a recent column, I said the production tax would drop to $12 million if oil stays at $35 for this year and the next fiscal year. What I failed to make clear is that this amount is not really part of the production tax. It represents the nickel-a-barrel surcharge for the oil spill response fund.
Gov. Bill Walker is proposing changes to the credit system, an increase in the minimum gross tax to 5 percent and adjustments to fill the hole in the floor. The prospect of getting next to nothing from oil will energize that debate in the months ahead.
As prices decline, the state takes a major hit on its royalty oil, the portion of the resource it holds as the land owner. A $20 drop from the predicted fiscal year 2017 price of $56 a barrel would translate into a $400 million drop in total annual royalties.
Overall, the state has predicted that when all of the elements of unrestricted oil revenue — excluding the royalties for the Permanent Fund — are counted against what is spent on tax credits, the state would net more than $500 million in oil revenue in the next fiscal year. That expectation is based on oil prices averaging $56 a barrel. If oil averages $30 or $35 a barrel this fiscal year and next, all of that could be wiped out.
The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)alaskadispatch.com.