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Oil Prices Drop Below $60/Barrel

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Prices for U.S. crude oil fell to under $60 a barrel last week, its lowest level in more than five years. Data showed that U.S. inventories of refined petroleum products are growing, and a Saudi Arabian official said the nation has no plans to scale back output. The head of Kuwait’s government-run oil company said he expects the price of oil to fluctuate in the vicinity of $65 a barrel for six or seven months. And on Friday the International Energy Agency revised downward their forecast for global oil demand, the fifth time in the last six months.

ANS oil traded at $59.70, a long way from the $115 price needed to balance the state budget. At these price levels the state’s budget deficit looks to be $3 billion.  Welcome to Juneau Governor Walker, now start cutting!!

An ADN article notes: “Even before oil prices plunged in current fiscal year 2015, something interesting happened to Alaska finances in 2014: Oil revenue, long the king, was unseated as the state’s top moneymaker.”

“In fiscal year 2014, which ended June 30, investments led the way, bringing in $8.1 billion for Alaskans. That topped the $5.7 billion that Alaska made from oil and the $2.5 billion it got from the federal government. The remaining $1 billion included assorted taxes and fees.”

Meanwhile another ADN article discusses pension obligation bonds as a way to shore up the PRS/TRS pension fund deficit. The idea is to issue debt and buy stocks and “earn the spread.”

My advice: “just say no”. It’s the Hail Mary pass all over again. Recall Wikipedia’s definition: “A very long forward pass in American football, made in desperation with only a small chance of success, especially at or near the end of a half.”

The solution to a deficit is to cut spending or raise revenues. Both are unpleasant so many politicians choose a third option: take more risk and earn a higher return on investments. But that can cut both ways as stocks go up and down! Oh and by the way, stocks aren’t cheap now.

Jeff Pantages
Chief Investment Officer

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