Legislature(1993 - 1994)
03/20/1993 10:10 AM Senate FIN
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE AND
HOUSE FINANCE COMMITTEE
March 20, 1993
10:10 a.m.
TAPES
SFC-93, #40, Side 1 (120-end)
SFC-93, #40, Side 2 (end-125)
CALL TO ORDER
Representative Ron Larson, Co-chair, House Finance, convened
the meeting at approximately 10:10 a.m.
PRESENT
The following members attended:
Senate Finance House Finance
Senator Pearce Representative
Larson
Senator Frank Representative
Hanley
Senator Kerttula Representative
Parnell
Senator Sharp Representative
Grussendorf
Representative Brown
Representative
Martin
Representative
Foster
ALSO ATTENDING: Senator Taylor, Representatives Davies,
Sanders, Vezey; Darrel J. Rexwinkel, Commissioner,
Department of Revenue; Rod Mourant, Assistant Commissioner,
Department of Revenue; Mike Greany, Director, and Dave
Tonkovich, Fiscal Analyst, Legislative Finance Division; and
aides to committee members.
PARTICIPATING VIA TELECONFERENCE: Daniel Yergin, President,
and James Placke, Director, Cambridge Energy Research
Associates from Cambridge, Massachusetts.
SUMMARY INFORMATION
Discussion of revenue prices, oil prices, production,
and the uncertainty of the political situation
surrounding these issues was had via teleconference
with Daniel Yergin, President, and James Placke,
Director, Cambridge Energy Research Associates (CERA).
Representative Larson introduced Daniel Yergin, President,
and James Placke, Director, Cambridge Energy Research
Associates (CERA) who he said were testifying via
teleconference from Cambridge, Massachusetts, and invited
them to begin their presentation.
Daniel Yergin, President, CERA, said that it was a pleasure
to meet with the Alaska legislature, and speak to oil prices
which are so critical to Alaska's overall economy.
James Placke, Director, CERA, directed attention to two
handouts prepared by CERA (appended to these minutes as
Attachment A and B). He asked the committee to turn to a
graph titled "The New World Oil Order, The 1991-94 USGC ANS
Oil Price Environment" which represents CERA's view of oil
price fluctuations. He said that the graph shows a price
increase of about 30 cents a barrel for any given 12-month
period. The average for 1993 is $18.30, 1994 is $18.60, and
the FY94 outlook is $18.50.
Mr. Placke said that the graph shows two significant points.
First, a 30-cent a barrel increase is not bad news.
However, if an inflationary rate of 3 percent (or 55 cents a
barrel) is taken into consideration, the 30-cent a barrel
per year increase is really a slight decline in price.
Secondly, between the second quarter of 1993 and the end of
the year, CERA feels that there are more likely to be
depressing than encouraging factors on the market. The main
consideration is the extent to which OPEC will be able to
maintain price discipline. It is already clear that OPEC
production will not decline to the pledge of a billion and
half barrels a day off the market. However, there is a
decline, and it seems feasible that it could be on the order
of a million barrels a day which is what it would take to
stabilize prices. He promised a more detailed discussion
about OPEC and Kuwait, two wild cards in the scenario, later
in the presentation.
Mr. Placke said he wanted to show the committee how CERA
arrived at the projected price outlook. He explained that
the worldwide stance from 1992 to 1993 has essentially been
flat. A 1993 to 1994 increase is projected at about a
million barrels a day. He pointed out that the Japanese
economy had come into a recession, and there was a projected
modest increase in North American trends and in the key
elements of western Europe, explaining the modest outlook of
approximately 50,000 barrels a day. The really negative
side is reflected in the Commonwealth of Independent States
(CIS), the former Soviet Union, and eastern Europe. The
question that overhangs the entire outlook is, if
consumption should continue to decline more rapidly in
Russia than the decline in production, will we see
additional lines of exports coming out of Russia and other
principal CIS exporters. Although this is relatively
unlikely, a degree of risk exists, compounded by the unclear
political trends in Russia, which could lead to greater de-
centralization and even less discipline over exports, and
the possibility that exports could increase. Overall, the
outlook for FY93 is flat. The world demand could increase
by about 5 million barrels a day for FY94, given the fact
that the U.S. and Canada are at the start of recovery, and
Japan is projected to start into recovery by the end of this
year.
On the supply side of the worldwide picture, the principle
exception is the successor states of the Soviet Union, where
we saw Russian production for 1992 continuing a sharp slide,
although not as sharp as the previous year. This downward
trend is projected to continue into 1993, with production
again dropping about one million barrels a day, and
consumption dropping at a comparable rate. CIS exports will
be relatively constant. The risk is that there is more
likely to be an increase in exports at this point. However,
CERA feels that the rate of decline will continue into 1994.
For the rest of the world, there is an abundance of oil.
Significant increases in Persian Gulf production capacity is
foreseen, not only for 1993 and 1994, but into the mid-90s.
Because the Persian Gulf production capacity exceeds the
worldwide increase in demand some years, it remains a
depressing factor that overhangs the market. The North Sea
will continue to show growth, although at somewhat a
declining rate.
Mr. Placke spoke to OPEC, and the uncertainty surrounding
it. OPEC's ability to maintain discipline is of major
concern. He pointed out that Saudi Arabia and the United
Arab Emirates (UAE) have instituted genuine reductions in
output and exports. The big question mark is Iran. It had
boosted exports at the end of February, after the OPEC
agreement, for the purpose of producing as many barrels as
it could before being charged in violation of its
commitment. Although Iran will probably move in the
direction of the commitment, to what extent is still
unclear. Kuwait remains another question mark and was a key
obstacle at the last OPEC meeting in February. A compromise
was reached with Kuwait to bring production down from 2
million barrels a day to 1.6 million barrels, through the
end of the second quarter. This lays out the basis for the
argument that Kuwait has sacrificed disproportionately since
it was out of production during the Iraq occupation, and is
now giving up an additional 400,000 barrels a day for the
goodwill pack. Kuwait has agreed to produce less than it
could, but it seems to have a goal of 2 millions barrels a
day. The extent to which Kuwait will exercise restraint,
and adhere to its OPEC agreement, is certainly an issue to
watch.
In addition to maintaining discipline between the key OPEC
exporters, the addition of Venezuela, Nigeria and Lybia (all
three who have tended to be over their capacity),
complicates the question. Nigeria, for instance, has been
significantly over as much as 300,000 barrels a day. CERA
sees the repetition of a pattern where things begin to
deteriorate as we move through the second quarter of this
year. It is likely that OPEC will periodically reopen the
pact, as it has in the past, to reinstill discipline. For
instance, Saudi Arabia has substantial revenue requirements,
and continues to run budgetary and current account deficits.
Any action on its part to cut production would mean a great
sacrifice. CERA does not anticipate a quiet next quarter
but sees OPEC as off-balance, and producing less oil than it
could. Conditions in the market are sufficiently stressful,
and there is likely to be a much higher than normal level of
inventory going into the low part of the demand cycle. We
could see some genuine discipline coming out of the next
OPEC conference in June. Kuwait will have to be dealt with,
and since it is not useful to speculate beyond a certain
point, OPEC will continue to be one of the main focuses of
attention.
The other factor, beyond OPEC politics and Kuwait, is the
status of Iraq. Iraq has gone nearly two and half years
without exporting oil, sacrificing approximately $37 billion
of lost oil exports during that period. Its economy is in
shambles, and if possible, getting weaker. With the country
on its back, the standard of living for the general
population is just above subsistence. It is possible for
Iraq to continue like this indefinitely. The issue is
really political. As long as Saddam Hussein is in power,
and policies remain the same, there is no chance that the
United Nations will withdraw its sanctions, and allow Iraq
to resume exports. Iraq will continue to attempt to have
sanctions lifted, but CERA feels they will be unsuccessful.
Although Iraq continues to seek dialogue with the U.S., that
might accomplish some resolution, the U.S. shows no
motivation to lean in that direction. The Security Council
has maintained sufficient discipline of the former coalition
so political circumstances have not changed with respect to
Iraq. There is an increasing risk, as we move into the
second quarter, that Iraq's frustrations will challenge the
United Nations and the United States and cause new tension
in the Iraq and Gulf coalition. CERA projects that Iraq
will continue to represent itself as the victim rather than
the aggressor, and, to some degree, even welcome more
punishment in order to make a better case of being the
aggrieved party. Iraq's production, when it does return, is
likely to come back quickly and at a relatively high volume.
CERA sees Iraq as physically being able to export as much as
one and half million barrels a day within two months of
sanctions being lifted. The production potential and
facilities to transport and export are there, and will only
increase as war damage is overcome. Iraq remains an
important but unpredictable part of the formula.
Mr. Placke asked Daniel Yergin to speak to Washington's
fiscal policy on taxation. Mr. Yergin said that the
consideration of a BTU tax has once again made energy a
political issue in Washington D.C. A BTU tax is part of
President Clinton's overall package, and will probably rise
and fall as that package goes through Congress. It is a
broader based tax, and it is controversial as is almost any
energy tax. The conflicting issue is the degree to which it
is a consumer tax, and how close or visible it is to the
consumer. The key question is: Where will the tax be
collected? If it is collected downstream, it could have a
negative affect on small producers in the United States.
The best guess is that natural gas will be taxed as it
leaves the refineries or at the importation point. It seems
apparent that a tax on diesel fuel will be passed on to the
consumer. In regard to residual fuel oil and natural gas,
CERA thinks it will be accomplished by a reallocation of the
tax among the products. The question is: Will Congress be
voting on two major taxes -- the BTU tax, and later, a value
added tax for health care. The main impetus for the tax is
the need to address the chronic budget problems that face
our nation. A BTU tax is supported strongly, especially in
the environmental community. It is a distinct innovation in
western countries. The Europeans and Japanese are looking
with great interest to see what happens to the BTU tax.
Previously, Europeans tried a carpet tax on oil with little
success.
End SFC-93 #40, Side 1
Begin SFC-93 #40, Side 2
The BTU tax will be copied or adopted by other countries
around the world. CERA recommends watching the new
administration to see where collection points occur because
that will have an effect on taxes and legislation.
Representative Larson asked if Mr. Placke would repeat his
introduction since more legislators had joined the meeting.
Mr. Placke said that to recap briefly, CERA sees the overall
price for crude oil on a global basis rising by about 30
cents a barrel from 1992 to 1993, and continuing at that
same rate into 1994. He said CERA sees ANS averaging about
$18.30 a barrel in 1993, rising to an average of $18.60 in
1994. He explained that the fiscal year price for ANS,
beginning July 1st, was an average of about $18.50. The
inflation rate of three percent, or about 50 cents, means a
decline in ANS of about 25 cents for the coming fiscal year.
He said it is important to note that, at least for the rest
of 1993, more risks are foreseen on the downside than the
upside. There is a whole list of factors one can consider.
Internal politics, crisis with OPEC, the uncertainties posed
by the former states of the Soviet Union, and the rate of
recovery for OCED economies are a few. The outlook is based
on projected rates not real performance. So the risk is
that it will fall short rather than overshoot the estimate.
Representative Larson asked if the averages CERA gave for
ANS was at the Gulf Coast price. Mr. Placke answered
affirmatively.
Senator Frank asked what effect the BTU tax might have on
the price of gasoline at the pump. Mr. Yergin said that the
figure proposed would increase the price by 7 cents a
gallon, but CERA believes it will be closer to 10 or 12
cents a gallon, because of the unequal distribution of tax
on different oil products.
Senator Frank asked if a BTU tax would have a significant
downward pressure on the use of oil. Mr. Yergin said that a
10 or 12 cent price increase would only mean a $60 addition
to a consumer's gasoline bill. He did not believe it would
make much of an impact, since it pales in contrast to the $4
or $5 tax Europeans pay on gasoline.
Mr. Placke said that the way in which the administration
proposes to phase in the BTU tax will also tend to disguise
and mitigate any effect on the consumer. The first element
of taxation would not go into effect until July 1994, more
than a year away. It would then progressively increase over
the next three years. He believed it would be sufficiently
gradual that the effect on demand would almost be
negligible.
Senator Sharp asked if the proposed BTU tax would cause any
distortion or lessen the competitiveness of oil in the
general energy market or would it be a wash on all energy
sources. Mr. Yergin said it will be fairly well publicized
but not totally recognized by the public. The tax on oil
would be approximately twice that applied to other forms of
energy. All forms will be taxed except exotic and renewable
forms, such as solar and wind power. Again, natural gas,
coal, nuclear, and hydro will be all taxed at a rate that is
about half that of oil. Mr. Placke said the tax is meant to
tilt things in the direction of natural gas, so oil will be
disadvantaged and must carry an extra burden.
Representative Brown asked how CERA's forecast related to
the Department of Revenue's forecast.
Commissioner Darrel J. Rexwinkel, Department of Revenue,
said that CERA's estimate was under DOR's estimate by 64
cents. He said DOR's estimated average for FY94 was $18.38,
considering that about 15 percent of the crude oil goes to
the Gulf and 85 percent goes to the West Coast. The West
Coast is about 90 cents to a $1 less than the Gulf Coast.
Mr. Yergin explained that CERA had not tried to make that
split between the Gulf Coast and the West Coast in its price
estimate. Commissioner Rexwinkel said that one forecast
could be as good as the other one.
Mr. Placke said that the downturn in Japan was much more
serious than the Japanese had expected. The Germans grossly
underestimated the extent of their recession, and it has had
an effect throughout Europe. So for those two forces, the
question is when will their economies start turning around.
Another question is: What is in the mind of Saddam Hussein?
Mr. Placke returned attention to the graph outlining CERA's
price view again. He indicated that the market demands are
represented by a band, and the CERA view is shown within
that band. He reiterated that CERA sees the preponderance
of risk, at least for the rest of 1993, as being on the
downside. Mr. Yergin proposed that the band certainly
encompassed DOR's forecast.
Commissioner Rexwinkel said that Kidder Peabody projected
$21 for the third quarter of 1993, $22.50 for the fourth
quarter of 1993. and $22 for 1994. He said that is a
higher forecast than DOR's, and Merrill Lynch is even
higher.
Commissioner Rexwinkel made the point that every $1 increase
in a barrel of oil, after royalties, meant an additional
$135 million to the general fund. So even a 50 cents
difference, which equals about $70 million, is a large
consideration of the Alaska economy. Mr. Yergin said that
CERA was very sensitive to the factors that could work on
the downside. At some point in 1993 or 1994, Iraq is going
to come back into the market. The degree to which the other
producers accommodate Iraq partially depends on who is in
charge, and Iraq's relationship to the U.S. Iraq probably
had hoped for a change of policy with the new administration
but that is unlikely. These political questions could have
a large impact on Alaska's revenue. Mr. Placke said that
one must recognize the fact that the political picture is
highly unpredictable. Iraq is more desperate for revenue
than any of the other oil exporters. Mr. Yergin said, in
addition to the cost of the war, Iraq has already lost $37
billion dollars in lost oil revenue. Everyone realizes Iraq
will come back into the market, making for a very difficult
period of adjustment. The question is when.
Commissioner Rexwinkel explained that in the DOR forecast,
Iraq was not considered part of the market. Representative
Martin pointed out that one difference between CERA and DOR
was the factor between the West Coast and Gulf Coast price.
Representative Brown observed that DOR's forecast had been
adjusted, and the difference after adjustment was 60 cents.
Representative Larson invited Dave Tonkovich, Fiscal
Analyst, Legislative Finance Division, to speak to his
handout titled "Prices Corresponding to Graphs" dated March
19, 1993 (appended to these minutes as Attachment C). Mr.
Tonkovich said he had prepared a spreadsheet to explain the
two different forecasts by CERA and DOR. Both forecasts
show similar ranges and came up with comparable numbers. He
called attention to the FY93 average where CERA's figure was
in the range of $17.50 and DOR was $18.01. The slight
difference was that DOR always has a one month lag since the
fiscal year starts in June. He pointed out that last June
figures were high, and that accounted for some of the
difference. The FY94 average was $17.73 for CERA, about 60
cents lower than DOR's average of $18.38. Again, he
emphasized that different methodologies were used, but both
were in the same range.
Senator Sharp asked what figures on the Legislative handout
were actuals. Mr. Tonkovich said that FY93 Quarter 1, 2,
and 3 would be actuals.
Commissioner Rexwinkel said, in support of Mr. Tonkovich's
comments, that Alaska's oil production prices are reflected
a month later. June production prices equal July revenues.
He commented that the June high revenues of last year would
not be reflected in CERA's numbers.
Representative Larson thanked Mr. Yergin and Mr. Placke for
their presentation, He expressed the legislature's
appreciation for the relationship that was being established
with CERA and said he looked forward to working with them
again. Mr. Yergin thanked the legislature for the
opportunity to discuss oil prices.
ADJOURNMENT
Representative Larson, hearing no further questions for Mr.
Yergin and Mr. Placke, adjourned the meeting at
approximately 11:05 a.m.
| Document Name | Date/Time | Subjects |
|---|