In April, oil prices fell to historic lows, briefly dipping into the negatives for the first time ever. Since then, prices have stabilized, but remain modest, and they’ll likely stay that way for the foreseeable future.
While Alaska’s economy is less dependent on oil prices than it once was, there is still a lot at stake for the state financially. And, as impacts of the COVID-19 pandemic linger around the world, it’s unclear if or when prices will be high again.
In the spring, a few major things happened at the same time, causing oil prices to plummet. There was a price war, between Russia and OPEC. And, the COVID-19 pandemic fundamentally changed the way people around the world live their lives. People stopped traveling and spent less time driving.
All of that led to really weak demand on a global scale. Suddenly, there was way too much oil and gas in the world, and producers had to adjust.
“Basically oil producers have cut back on how much they’re producing,” said Clark Williams-Derry, an energy finance analyst at the Institute for Energy Economics and Financial Analysis. He says cutting production allowed oil prices to stabilize. But, they stalled out around $40 per barrel for much of the summer.
“What the oil markets are facing is every time the oil prices creep up a little bit, more producers are able to come back into the market, bring back oil that had been taken offline, and keep prices back down,” said Williams-Derry.
Williams-Derry says he hesitates to make predictions about what prices will look like in the future. But what we do know is that, even as pandemic disruptions let up some, demand for oil is returning very slowly.
“This now filters into sort of a slow and sluggish economy, unemployment and some difficult times for the economy just picking up, not just in the U.S. but around the globe.” said Williams-Derry. “So there is a real risk that we’re going to be in a slow growth for oil demand scenario for the next good little while.”
On the supply side, Williams-Derry says companies have curtailed production and cut back on or halted drilling.
That includes companies on Alaska’s North Slope.
Oil revenue is a critical part of Alaska’s economy and has big implications for the state’s budget. Though, Dan Stickel, the Chief Economist at the Alaska Department of Revenue, says the state is not as dependent as it once was.
“We’ve been using a portion of Permanent Fund earnings beginning with fiscal year 2019,” said Stickel. “And that’s actually the biggest source of unrestricted revenue now, which provides some stability.”
Stickel says there are several unknowns that could impact what prices look like in the future. Right now, he notes that global oil demand has rebounded some as economies reopen.
Even so, all of this is happening in an already struggling Alaska economy.
Larry Persily is a long-time observer of the oil and gas industry. He says, the state was hurting before prices crashed this spring. And now prices are still really low.
“It’s better in that it covers the cost of actually producing the oil,” said Persily. “But it doesn’t cover the investments you made in exploring and developing that field. It doesn’t produce enough cash flow for the companies to invest in next year’s oil, produce this year’s oil, pay dividends, pay down debt.”
Persily says weak demand persists — that was apparent earlier this month, when prices fell below $40 per barrel for the first time in months.
Persily says this high $30- to low $40-per-barrel range could be the new normal for some time. The world will always need oil, he says, but there are big questions about what the industry’s long-term future looks like.
“Does it get back into the 50s or 60s where companies could start investing and looking at substantial new projects?” said Persily. “Does it do that? Or does demand never return to where it was in 2019? Are we seeing the start of the decline of oil consumption around the world?”
As for the short-term outlook, industry observers are waiting to see when drilling will pick up, whether new projects will begin, and whether new investments will be made.
And right now, amid a world of uncertainty and unpredictability, investors are still hesitant. Williams-Derry, in Seattle, says they’re standing by the sidelines, waiting for a clearer picture of the future.