Eight months ago, the state Department of Revenue predicted oil prices this fiscal year would be in the vicinity of $66. That same forecast said prices would rise in the years ahead, hit $109 by 2020 and remain in triple digits thereafter.
It embodied the fading Alaska prayer that the collapse in oil prices is a short-term blip and not a trend that will last.
The belief that higher prices will return is at the root of the dream, now a matter of faith among some Republican leaders, that if Alaska cuts the state operating budget to $4.5 billion, our financial problems will be solved and we will have achieved a "sustainable budget," with no need for any difficult decisions about taxes or the Permanent Fund dividend.
The problem with the miracle plan is that oil prices today are closer to $40 than $66. And basing a budget on oil price increases that haven't happened is like deciding now to pay your mortgage next year with winnings from the Nenana Ice Classic.
The International Energy Agency, one of the world leaders in the guessing game, is predicting oil prices might rise to $80 a barrel by 2020, far below what the state needs to temporarily escape its financial crisis. Even with oil at $100, we would still need about $1 billion a year from savings to fund state government.
Rather than act as if oil revenue is guaranteed to double by 2020, trusting that OPEC and China will provide a reprieve, we should take a conservative approach and restructure state finances.
Scott Goldsmith, a professor emeritus of economics at the Institute of Social and Economic Research, has been a leader in studies about the state economy for decades. I respect and admire his work.
He has a theory about the "maximum sustainable yield," based on the value of state financial resources and petroleum resources still in the ground. This theory certainly has a place in any discussion about Alaska's future, especially in regard to using Permanent Fund earnings as part of a budget solution.
Unfortunately, Goldsmith's work has been ginned up into a miracle "sustainable budget" plan, with claims that the only thing necessary for the state to solve its long-term financial problems is to cut the operating budget to $4.5 billion and cover the rest with billions per year from savings and investment earnings.
The problem is that justifying the spending of investment earnings today on the basis of petroleum assets that may not be developed for many years — if ever — is far too speculative to become part of a budget formula.
The decline of the oil-in-the-ground assets in Goldsmith's model from $100 billion to $69 billion in the past four years — largely because of market changes and not a reduction in physical assets — is the strongest indicator a "sustainable budget" should not be constructed in this fashion.
We have people arguing that the miracle plan means there is no need for an income tax, sales tax, increased oil tax, or a reduction in the dividend. In broad terms, the GOP has latched onto this, which is why we have legislative leaders who say that we don't need to do anything in 2016 but get to $4.5 billion.
The attraction is easy to understand. We are the ideal audience for the message that we can keep spending billions from savings, enjoy the current level of state services and continue without state taxes, while assuring ourselves that oil and gas income will double by 2020 and climb in the years thereafter.
But that is a risky proposition, as no one knows what will happen to oil prices. The meetings in Paris about climate change, the campaign to reduce carbon emissions and the international twists and turns of the oil business are among the outside influences that will change the future in ways that are impossible to know.
As it stands now, the Constitutional Budget Reserve and the Permanent Fund Earnings Reserve are facing an expiration date. If low oil prices persist, those funds could be gone in four or five years because oil income is about $2 billion, while state spending is closer to $5 billion a year.
Then what?
I think we need to: cut spending by a few hundred million and hold it there, which means a long-term decline in services; institute a reasonable state income tax; cap the dividend at about $1,000 and direct some Permanent Fund earnings to pay for state services; trim oil tax credits by several hundred million; raise the minimum gross oil tax, now at 4 percent; and look at a variety of other taxes and user fees. There will be damage to the Alaska economy.
But that's the way to build a sustainable budget. If oil revenues increase in the years ahead and the gas pipeline materializes, the burden transferred to the next generation of Alaskans will not be as onerous as it might otherwise be.
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.