Oil & Gas
The Ups and Downs of Oil
Global markets continue to jostle Alaska’s oil prices
By Isaac Stone Simonelli

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-at-home 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.

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 were fairly strong throughout 2021. “The price recovery came from demand recovery,” Szymoniak says. “People started flying again, and other aspects of the economy also took off.”

Nonetheless, the oil and gas sector in Alaska has been slow to respond compared to the rest of the country, Fried explains. “The rest of the country has seen more drilling activity and just more oil industry activity than we have for the higher oil prices,” Fried says. “But that’s pretty typical because we’re very, very project based here.”

Unlike the Permian Basin in Texas or the Bakken Formation in North Dakota, Alaska projects take a lot more lead time and investment due to both their scale and remoteness.

“It takes planning. We don’t just go out and drive some big trucks and drill holes in the ground,” Fried says. “We are beginning to see some uptick and activity now, but very little.”

In addition to the usual lag that Alaska experiences in the oil and gas industry, uncertainty around the federal leasing program and the court decision for the Willow Project have both caused delays in the recovery, Moriarty says.

Senator Lisa Murkowski, Senator Dan Sullivan, and Congressman Don Young all spoke out against the scrapping of essential permitting for the Willow Project, a multi-billion dollar expansion of ConocoPhillips’s oil and gas operations in the National Petroleum Reserve-Alaska (NPR-A).

“This District Court Order vacating key approvals and permits for Willow is just plain wrong,” Senator Murkowski said in an August news release. “In partnership with communities on the North Slope, ConocoPhillips Alaska has been responsibly producing oil from the NPR-A region for decades under the highest environmental standards and this proposed project will be no different. Although this is a setback for Willow, it is not the end. Even the Biden administration has come to understand what Alaskans have always known—that the Willow Project must move forward.”

Gasline Hopes Undimmed
Unlike oil prices in Alaska, which are strongly dependent on the global market, natural gas prices in the Last Frontier exist in their own bubble—at least for now. This is primarily because most of the gas comes from Cook Inlet for domestic utilities in a relatively static market.

“That’s a captured resource, and that’s not exported,” Fried says. “Most of that is being used for local consumption. And it’s very heavily regulated because it’s used for utilities.”

The stable prices in the Last Frontier—mostly fluctuating with seasonal demand—remain despite Henry Hub natural gas prices swinging from more than $4 per million BTU in 2018 down to $1.63 in June of 2020 back up to more than $5.50 in October 2021.

“For the last almost ten years there’s been no connection between the Cook Inlet natural gas market and the world natural gas market,” Szymoniak says.

The Alaska Gasline Development Corporation (AGDC) is working hard change that. Formed by the legislature in 2010 and acting since 2013 as an independent public corporation, AGDC has focused on an in-state pipeline to help unlock the vast gas resources on the North Slope and bring them to a global market.

Szymoniak explains that, because of the amount of infrastructure needed to move natural gas off the North Slope, there needs to be a strong LNG export market established for the gas. Nonetheless, the project would also provide lower prices for natural gas to Alaska communities, including to city centers, such as Fairbanks and Anchorage.

“There’s also a flip side for Alaskans… when the commodity price is higher, the products that we buy—whether that’s your home heating oil, your fuel, your lights, your gasoline, your snowmachine, your fish, your boats, your airplanes—the price of that commodity goes up too.”
Kara Moriarty
President and CEO
Alaska Oil & Gas Association
Alaska has been eyeing a natural gas pipeline for decades, working especially hard to develop markets for the resources in Asia, but the economics have never quite penciled out.

Szymoniak says that’s changing. “It very much pencils now,” Szymoniak says, based on recent global gas prices. “It’s a highly economic project.”

Paying the Price
While delays in developments in Alaska affect future prospects of jobs and revenue in the state, they play less of a direct role in current oil and gas prices.

“The big question is what’s the supply gonna look like? What’s OPEC going to do?” Fried says.

The role OPEC, Russia, and the Permian Basin have in setting oil prices is not an entirely new story, as they can all react quickly to changing markets and produce enough to move those markets.

“Today, as demand has picked up and supply hasn’t been able to catch up, prices have gone up,” Moriarty says. “As there was a little scare of the new variants and what that was going to mean to demand, people got a little shaky and prices went down.”

In December, the US Energy Information Administration (EIA) pointed toward the uncertainty tied to COVID-variants. The Omicron variant has introduced additional unpredictability into oil markets, and this uncertainty is reflected in the recent increase in oil price volatility.

“It is not yet clear how Omicron will affect oil markets and the broader economy. One of the most likely markets to be affected is jet fuel, and some flights have already been canceled because of the variant,” EIA stated on its website in December.

Nonetheless, EIA expects global oil demand to rise by 3.5 billion barrels per day in 2022.

In a move to combat the rising costs of gasoline as oil production lags behind demand, the Biden administration in November authorized the release of 50 million barrels of oil from the Strategic Petroleum Reserve “to lower prices for Americans and address the mismatch between demand exiting the pandemic and supply.”

Gasoline prices averaged $3.39 per gallon in November, $1.29 higher than in November 2020—and the highest since September 2014.

The Biden administration’s move was met by sharp criticism from Congressman Young. “The release of this oil is a clear acknowledgment of the need to increase domestic supply. So what I don’t understand is why this President thinks it is a better strategy to raid our coffers rather than put forth a real energy solution,” Young wrote in a news release.

“I am frustrated by the lack of common sense among this nation’s leadership,” he added. “The Chukchi and Beaufort Seas hold 27 billion barrels of oil, the 10-02 area of Arctic National Wildlife Refuge holds roughly 10.6 billion barrels, and the National Petroleum Reserve-Alaska has 2.7 billion barrels and already has infrastructure in place to bring the oil to market!”

While high oil prices are a boon to the industry, its workers, and government treasuries, they also have a near-immediate negative impact for consumers.

“There’s also a flip side for Alaskans,” Moriarty says, “when the commodity price is higher, the products that we buy—whether that’s your home heating oil, your fuel, your lights, your gasoline, your snowmachine, your fish, your boats, your airplanes—the price of that commodity goes up too.”

Higher energy costs have a disproportionate impact on some rural communities in Alaska.

“I think it’s always important to remember that Alaska has a lot of communities that don’t have very much income and pay very high energy costs,” Szymoniak says. “So when oil prices go up, we need to kind of temper our celebration of the extra revenue, and make sure that those who have real hard problems paying for energy, when it gets cold like this, are considered.”