OIL & GAS
The Ups and Downs of Oil Global markets continue to jostle Alaska’s oil prices By Isaac Stone Simonelli
O
il price responsiveness to the fundamental economic principles of supply and demand remains on full display as the pandemic drags on with new variants and subsequent market scares. “At the onset of the pandemic, when governments around the world started implementing shutdowns and stay-athome orders, the demand for petroleum products just bottomed out,” says Nick Szymoniak, venture development lead for Alaska Gasline Development Corporation and a former consultant for the McKinley Research Group. People stopped driving. People stopped flying. There was an unprecedented plummet in demand for petroleum. “The demand dropped off and we had way too much supply, and at one point we had negative oil prices,” explains Kara Moriarty, the president and CEO of the Alaska Oil & Gas Association. On April 20, 2020, prices for the benchmark grade of West Texas Intermediate crude oil dropped $55.90 to -$37.63 a barrel on the New York Mercantile Exchange. It was the first and only time a contract closed at a negative value, according to Dow Jones Market Data. Even before the pandemic hit, there was already downward pressure on oil prices, with Saudi Arabia and Russia both stating that the countries would increase production, Szymoniak explains. The changes in prices are mostly due to speculation and the balance of near-present supply and demand—even beyond the pandemic.
30 | February 2022
There is very little significant storage of oil—outside of the federal Strategic Petroleum Reserve—which results in product being pumped out of the ground and put in short-term storage before being sent directly to refineries and into the market. Szymoniak says, “Without being able to warehouse product, like you might see in other markets, other commodities, the result was the price just absolutely fell out.” And it doesn’t take wild swings in the amount of supply or demand to affect prices. “If demand exceeds oil production even by marginal amounts, that'll have pretty significant upward pressure on price,” Szymoniak says. “[Production] is almost all fixed cost. So once you have a well that's producing, the incremental cost to continue production is pretty low.”
Echo of Recession The pandemic wasn’t the first time the bottom has dropped out on oil prices, but the way it did so was unprecedented. Oil prices in Alaska peaked in 2014 at more than $100 per barrel before crashing to near-record lows, triggering a statewide economic recession. That crisis was waning when the COVID-19 pandemic arrived. “Late 2019/2020, things started to get a little active again,” says Neal Fried, an economist with the State of Alaska. “We all expected 2020 to be a good year.” Instead, prices went “places that they had never been before” and activity dropped off, leading to significant layoffs in the oil and gas sector, Fried explains.
A couple of small fields were shut-in— though they’re back online now—both on the North Slope and Cook Inlet. “We had a period of time where there were absolutely no rigs running for the first time,” Moriarty says. Production dropping off forced companies to be more efficient, she explains. “Even though prices are up, the jobs haven't followed yet,” Moriarty says, “because we've learned how to be more efficient.” Industry-wide belt tightening has continued as long as capital markets are wary of financing oil projects, she adds. Shocks to the petroleum sector ripple out to the government sector. For FY2021, state and local governments are estimated to collect more than $2 billion in revenue, royalties, and taxes based on the average price of $54 a barrel, Moriarty explains—significantly lower than the projection of $3 billion for FY2022. “When prices crash, the state has less money,” Moriarty says. “In the height of COVID, we paid zero corporate income tax, which means we weren’t making money, but we still paid royalty production tax and property tax.” Those alternative levies amount to a hedge for public sector treasuries. “The state and local governments still received about $2 billion in FY2020. Even in a year that the industry makes nothing,” she says.
Lagging Recovery Since the onset of the pandemic, oil prices have started to recover. Prices
Alaska Business www.akbizmag.com
