Alaska Oil Production = Ecuador’s (+/-)
Note that while Alaska was once the largest US oil producing state at over 2 million barrels/day, its Trans Alaska Pipeline System (TAPS) is currently 3/4 empty. Ecuador, a small OPEC producer taps from its reserves about the same as Alaska now produces, a little over 500k barrels/day.
This WALL STREET JOURNAL story attracted the attention of our Mid-Atlantic energy analyst friend in his commentary below, which should interest our US and Canadian readers. Our readers should be interested because the WSJ article and our anonymous analyst friend’s commentary suggest that increased shale production and the lower cost of non-OPEC oil production are likely to restrain oil price increases. We might also extrapolate that similar LNG competition is likely to obstruct Alaska’s bureaucrat controlled LNG project and BC LNG projects for the foreseeable future. -dh
Our friend’s commentary:
In a seller’s market, higher prices inevitably reduce supply from producing countries, as risk capital is not needed, reserves are viewed as an investment, and production is either restrained or diverted to local use. In a buyer’s market, production is increased and capital flows in to buy perceived cheap assets.
In dealing with OPEC, pay attention to what its members do, and give little heed to what they say.
The story about Ecuador below reinforces two of the items in the “Immutable Principles”, quoted above. There has been continuing “noise” coming from OPEC members and its compatriots attempting to raise oil prices through imposing quotas and cutting production. Hardly a day goes by in this saga that someone is not moving the goal posts (or pretending to). The whole saga has read like a dime-store novel, without the sex.
This is not the OPEC of 1973, nor the OPEC of 1999, in its reclamation of prior glories. Its members have extremely diverse economies, motivations, and reserve capacities. Several of them are various degrees of basket cases (See; Venezuela, Nigeria, and Libya). About the only common thread is that they have oil-dependent economies, each with a definite need to maximize short-term revenue. As a result, it is somewhat delusional to expect cartel cohesion across the board. And the longer the time period involved, the more this will be the norm.
Ecuador is one of the more oil dependent on the spectrum. But they are hardly outliers in the so-called production cut effort (one is tempted to call it a “charade”).
Even more importantly, few observers should have any confidence that this effort will really accomplish anything by itself. This seems like perverse variation on one of our favorite signs. Our former doctor had a sign in his office that read, “Medicine is the art of keeping the patient amused while the body heals itself.” We cannot help thinking that the OPEC communiques are a way to keep the market from collapsing before low prices cure the market.
S&P Global Ratings has made good on its warning, joining Moody’s Ratings Service in downgrading the State of Alaska’s credit ratings once again…
Governor Walker Reacts to Downgrade of Alaska’s Credit Rating
News Release, Governor’s office: July 14, 2017 JUNEAU —Governor Bill Walker reacted to Moody’s announcement yesterday evening that Alaska’s credit rating has been downgraded to “Aa3” and remains on negative credit watch. The report cites “the large structural imbalance that the state has still not rectified, and the ongoing spending of the state’s reserves”. It also warns that, “as the state’s reserves diminish, its options to close the budget gap narrow and the consequences should it fail to do so intensify”.
“Today’s announcement from Moody’s is concerning but not surprising,” Governor Walker said. “The agency’s analysts note that Alaska is essentially in the same position as last year: the budget is imbalanced by several billion dollars, and the legislature has not yet adopted a complete fiscal plan to remedy the situation.
“When I took office, I made long-term fiscal stability a top priority of my administration and warned of the consequences of legislative inaction. We now see those consequences coming to fruition. In spite of significant financial reserves and the lowest tax burden in the nation Alaska continues to operate with a structural budget imbalance that is, according to Moody’s, both unstable and unparalleled by any of the other 49 states. In the last three years, Alaska has gone from the highest credit rating in the nation to the 3rd-lowest, better than only Illinois and New Jersey. We simply cannot afford to wait any longer to take our finances and budget issues seriously. Alaskans are depending on us. I will continue to work to resolve Alaska’s fiscal problem this year.”
Timeline of Alaska’s Credit Ratings
- March 3, 2015 – Moody’s, S&P, and Fitch Ratings separately affirm Alaska’s AAA bond ratings
- November 2, 2015 – S&P optimistic Alaska will enact long-term, structural reforms to close $3.5 billion deficit
- January 5, 2016 –S&P lowers Alaska’s credit rating to AA+ negative, citing declining oil prices and a lack of adoption of a comprehensive fiscal plan
- February 29, 2016 – Moody’s lower Alaska’s credit rating to Aa1 negative, again citing low oil prices, declining savings, and lack of a complete plan.
- June 14, 2016 – Fitch lowers Alaska’s credit rating to AA+, citing lack of a complete fiscal plan.
- July 25, 2016 – Moody’s again lowers Alaska’s credit rating to Aa2, citing inability to address structural fiscal challenges, and lack of a complete fiscal plan.
- June 20, 2017 – S&P places Alaska’s credit rating on negative CreditWatch, citing continued reliance on savings and lack of new revenues.
- July 13, 2017 – Moody’s again lowers Alaska’s credit rating to Aa3, citing continued inability to address structural fiscal challenges, and lack of a complete fiscal plan.
Reference PDF: Moody’s analysis on Alaska’s credit ratings.