Alaska State budget discussions.

• Author: Miller, Amy
• Position: ALASKA TRENDS

With the start of a new year comes a look at Alaska's likely economic fortunes. With a new legislative session about to begin, the topic looming large above all else is the state's economic outlook.

Starting in the third quarter of 2014, the price of a barrel of Alaska North Slope crude began to decline, from a high in 2014 of just over $110 per barrel in June to less than $70 per barrel in December. Because of the huge role oil plays in the state budget, Alaskans will soon be feeling the pinch.

The state's fiscal-year 2015 budget was built on the assumption of approximately $105-per-barrel oil; at $85 per barrel, the state can expect a $3.3 billion deficit, according to Scott Goldsmith of the Institute for Social and Economic Research at the University of Alaska Anchorage.

Why is this price dip hurting Alaska's economic prospects so much and so rapidly? Because oil production on the North Slope has been declining for many years. In the recent past, the high price of oil has masked this decline. But with prices and production trending downward, there's little relief in sight with status-quo spending and taxation policies.

Revenues from taxation on the oil and its associated industries account for 90 percent of state General Fund revenues, and more than 50 percent of overall state spending. In the past, when oil prices declined, recessions were mitigated somewhat by federal government spending. But federal spending is also on the decline, and it is unlikely to cushion this latest price drop to the degree it has in the past.

The good news is Alaska has options for mitigating the situation. As of the beginning of the current...