Dunleavy administration forecasts hundreds of millions in new revenue due to higher oil prices

The Alaska Department of Revenue on Friday projected $545 million in unforeseen revenue to the state through the end of the fiscal year, due in large part to higher oil prices driven by war in the Middle East.

In a biannual revenue forecast, the department projected the state will collect $2.7 billion in revenue from oil production and other taxes, up from its December projection of $2.1 billion from those sources.

The new projection was released two weeks after the U.S. launched strikes against Iran, launching a widening war in the Middle East that has rocked the global economy and caused oil prices to rise amid a closure of the Strait of Hormuz, a key waterway for oil exports.

The Department of Revenue in December had estimated oil prices to average $65 per barrel during the fiscal year that ends in June. The actual price through the first eight months of the fiscal year was $67 per barrel, department officials reported on Friday. The department is forecasting that the price will average $91 per barrel for the remaining four months of the fiscal year, driving the average price for the year to $75 per barrel.

Compared to revenue in other states, Alaska’s revenue, which relies heavily on the price of oil, has long been described as among the most volatile. A change in the price of oil by a single dollar over the course of a year can cause the state’s income to fluctuate by tens of millions of dollars.

Friday’s projection is set to have far-reaching implications for lawmakers’ budget-crafting process.

In addition to updating the forecast for the current fiscal year, the Department of Revenue estimated the state will have $510 million more in oil revenue in the fiscal year that begins in July — $2.7 billion compared to a previous projection of $2.2 billion.

That is based on a projected average oil price of $75 per barrel in the 2027 fiscal year, up from a previous projection of $62 per barrel.

That added money could be spent on capital projects, more education funding, a larger Permanent Fund dividend, or be saved for future use, said Rep. Andy Josephson, an Anchorage Democrat who co-chairs the Finance Committee.

Majority lawmakers in the House and Senate have so far called for caution with regard to oil prices and their impact on state revenue.

The price per barrel of North Slope crude, which had been hovering around $70 per barrel before the strikes on Iran began, jumped to $96 per barrel as of Wednesday.

But some lawmakers say it would be unwise to bank on prices remaining at the current level, given uncertainty over the duration of the war in the Middle East and its impact on global oil supply.

Meanwhile, Republicans in the House minority on Thursday urged the Legislature to count on higher oil prices to cover expenses in the current fiscal year, including to subsidize transportation projects and respond to fires and declared disasters. The higher oil prices, minority lawmakers argued in the House, eliminate the need for a draw from savings to cover those costs.

Gov. Mike Dunleavy earlier this year had identified roughly $500 million in supplemental budget items needed for the current fiscal year, including spending to make up for his veto of several budget items in June. If it holds up, the revenue in the updated forecast released by his administration would entirely cover the spending he requested.

This is a developing story. Check back for updates.