Today along the southern edge of the North American continent, where business has been booming, there are growing concerns that a slowing global economy already dragging down oil prices could do the same to oil production and throttle the boom.
Meanwhile, on the northern edge of the continent, where the economy has been struggling for years, there is a push to increase taxes on oil producers in the belief this could raise the funds needed to prop up state government spending.
Clearly, the nation’s two biggest states – Texas and Alaska – couldn’t be farther apart on their views of oil prices, taxes and the intersection of the two.
“It’s time people understood the hundreds of millions of dollars our current oil tax law is giving away, and taking away from our communities and neighbors,” former Alaska state legislator Les Gara writes of the northern view in the Juneau Empire. “Policies that smartly encourage business are good. Ones that give away a publicly owned oil resource through unjustified tax breaks just harm Alaskans from the youngest to the eldest.
“Fixing roughly $1 billion in oil revenue giveaways is a major, fair part of a plan to move this state forward again.”
The view down south is starkly different.
“…The economic indicators we monitor have begun to look like the beginning of the end for the economic expansion and West Texas’ ‘booming’ Permian Basin, as it has become known,” writes Houston Chronicle business reporter Erin Douglas wrote.
“Oil prices are stuck in what my colleague Jordan Blum describes as a ‘purgatory’ ($50-$60 per barrel) and jobs are already being cut across the state’s energy sector. Today, we think of the global market as oversupplied — after the initial spook of the attack on Saudi Arabia’s oil field, the market hardly shrugged at the news. The state’s mining and logging industry, which in Texas is dominated by the oil and gas industry, cut its workforce for the third consecutive month in August.”
Thankfully, Alaska doesn’t have a logging industry about which to worry. It’s so small that if it went away it would hardly be noticed. The mining industry is bigger, but it is in large part today as in the past tied to the extraction of gold, which usually trends upward as the global economy softens.
As the Business Times headlined in August, “Gold Prices Break $1,500 Mark As Investors Run For Safe-Haven Cover.” The run was sparked by the ongoing U.S.-China trade war, one of the big factors slowing the global economy, which brings this back to oil.
“When countries’ economies slow down, there’s less people driving, less business activity, less power usage… All leading to less demand for the oil pumped in West Texas. The market going forward looks like it’s going to be over-supplied,” Douglas wrote last week as if presaging the International Monetary Fund (IMF).
The same factors apply to oil in Alaska as oil in Texas only a maybe a little more so given higher production costs in the frozen north than in the sunny south. And the Alaska economy, for better or worse, remains largely dependent on oil both to power the private sector and support the public sector where oil taxes continue to fund most state and local government.
The local governments doing well by oil – those like the North Star Borough which can collect hefty property taxes from oil facilities – are largely insulated from the revenue ups and downs of oil prices and production. The state, however, is not.
How much money Alaska collects in oil royalties and taxes is the result of three factors: the tax rate, the oil price and the level of production. The only one of those things the state can control is the tax rate, which can influence the production rate.
With the flow of oil in the Alaska pipeline falling through most of this decade, the state several years ago offered oil producers incentives in the form of tax breaks to find more oil to put into production, and the scheme worked.
Revenue expects about 548,000 barrels per day for this year with production then steadily falling toward 503,000 by 2027. Considerable new oil has been found on the North Slope in recent years, but discoveries are by no means guarantees of production.
BP, the multi-national oil giant that arrived in Alaska at the start of the 49th state oil boom, certainly didn’t see a bright production future. It decided it’s time to leave the state. Many connected to or familiar with the Alaska oil business say they would not be surprised to see ExxonMobil, which holds a 36 percent interest in the Prudhoe field, follow BP out of Alaska if Exxon can find a way out.
The company has had nothing but problems trying to develop Point Thompson, primarily a natural gas field where Exxon says it is experimenting with a “high-pressure gas condensate cycling project (that) will be key to helping unlock Point Thomson’s potential.”
The big play, however, was always for gas. As Exxon put it, “the ongoing work and investments in Point Thomson are also laying the foundation for future gas development. Alaska has the opportunity to become a global natural gas leader. We are excited to be contributing to the next chapter in Alaska’s energy legacy.”
That was back before former Gov. Bill Walker browbeat the producers into letting the state take over a gas development project Exxon had been leading. Walker eventually got his way, hired a half-million-dollar per year Texan (now back in Texas) to find the way to the promised land, and courted Chinese financiers to put up the estimated $44 billion needed to finance the project.
China spurned Walker in favor of deals with Russian to obtain gas by land and by sea. Some in the industry have suggested the Chinese might have played Walker to negotiate better prices with the Russians.
The gas pipeline that was to be Walker’s pride and joy is now looking like another Alaska pipedream, although the state is continuing efforts to obtain a Federal Energy Regulatory Commission (FERC) permit for pipeline construction, having already spent the tens of millions of dollars necessary for the studies required for such a permit.
Nobody, however, expects a pipeline to get built anytime in the foreseeable future if at all.
Exxon – like BP – has meanwhile expressed its attitude toward Alaska with its actions. Mozambique earlier this month announced the company had agreed to invest up to $33 billion in a natural gas gas project in the African country.
As was the plan in Alaska, the gas will be liquified for shipment and sale in what has become a huge market for liquified natural gas (LNG) in a world the International Energy Agency says is already oversupplied.
Demand will, however, catch up with supply as it always almost always does, and that will change. In the interim, unfortunately, there is no telling how many sources for gas develop that are cheaper than the remote North Slope.
Against this backdrop, Hilcorp, which bought BP’s assets, is expanding its operations in Alaska following a company model of “redeveloping oilfields after the major companies have moved on to more lucrative prospects,” as John Dougherty writes for the Center for Biological Diversity.
“A key component in (company owner Jeffery) Hildebrand’s business model is to slash operating costs to the bone while offering six-figure bonuses for the rank-and-file as incentive to get the work done. The model appears to have worked well when oil prices were high.”
How the model works with oil prices low has been questioned, and it does come with some risk. Hilcorp has had safety and environmental problems. As a private company, it can deal with some of those issues easier than publicly traded BP, which took a public-relations beating anytime an old and corroding Prudhoe Bay pipe sprung a leak.
Given the high costs of fixing all the corroding pipes in a North Slope oil pipeline system designed to last only to 2005, industry authorities on the issue say the most cost-effective way to deal with the problem is to monitor the field closely for leaks, fix them and clean them up quickly when they happen, and pay the fines – if any – should environmental monitors decide the spilled oil did significant environmental damage.
For a good part of the year at Prudhoe, the damage is minor. The ground is frozen, and covered with snow and ice. The latter protects the soils below and eases spill clean up. And Hilcorp can get away with a program of monitor, fix and cleanup in a way that BP couldn’t.
Thus it has a different view on the economic viability of Prudhoe than BP had, which helps to explain its investment in Alaska. Still, economic viability remains a key point. Businesses exist to make money. If they don’t make money, they fail.
Enter the issue of taxation.
Too much, too little?
Gara and others don’t like the tax incentives the state gave the oil industry to up production and wants to do away with them. The view from their side is that Alaska is no longer getting its “fair share” of revenue from the oil found beneath the state.
“I refuse to go so far as some of my friends, and say one action will balance the state’s budget,” he wrote. “(But) fair oil revenue will help a huge amount. We don’t have to decimate a Marine Highway coastal Alaskans and businesses rely on. We don’t have to damage the opportunity, job training and road to success good public schools and a high quality university provides.”
The world, unfortunately, is seldom fair to everyone, and fair is itself a very subjective word as Roger Marks, a former petroleum economist for the state, pointed out in a commentary in the Anchorage Daily News.
“Most economists would say fairness entails taxes being competitive; taxpayers should pay a similar amount to what they pay in other similar places. Otherwise investment will go elsewhere and production suffers,” he wrote. “As measured by percentage of net pre-tax profits going to the state and federal government, the current system is competitive. (Including the “credits,” which do not really function as credits, but rather provide progressivity to the system.)
“Presently, the state alone is getting 45 percent of the net profits at current prices. It would get 64 percent under the initiative.”
Marks isn’t a fan of the initiative to raise oil taxes, classifies it an economic “mess” and questions its basic fairnesss. But fairness, or lack thereof, is not the way on which to judge this sort of political action.
The bigger and more important question is this: Will it work?
Will the initiative, in this case, do what its sponsors hope and produce more money for the state over the long run? Or will it cause oil producers to scale back and produce less oil, meaning less state revenue and possibly an earlier demise of the transAlaska oil pipeline?
One conspiracy-minded Alaskan actually wondered if some environmentalists might get behind the initiative for the latter reason. Alaska oil production is already falling steadily. A further decrease in production could lead to an earlier, rather than later, shutdown of the pipeline, and if the pipeline goes, the threat of oil drilling in the Arctic National Wildlife Refuge (ANWR) leaves with it.
At the moment, however, no economist was willing to offer a for-the-record assessment of what passage of the initiative might mean for oil production although most admitted they didn’t see how it could be anything but a disincentive to spend money to put more oil in the pipeline.
Why would companies pump more oil when it doesn’t help their bottom line?
“The initiative raises taxes at low prices, high prices, and in-between,” Marks noted. “At prices under $45 per barrel, the taxpayers (ie. the oil producers) would lose money while the state makes several dollars per barrel. At high prices, the marginal tax rate would be 70 percent. The taxpayer (ie. the oil producers) assumes the downside risk and the state gets the upside potential. It is a classic ‘heads I win, tails you lose’ scheme.”
The oil-tax initiative, of course, comes after years of recession in the state with the future still looking bleak.
Opponents of state budget cuts are trying to recall Gov. Mike Dunleavy for red penciling about $450 million in state spending, although some of those cuts were eventually restored and the final reduction ended up being closer to $400 million.
Despite those cuts, the state also looks like it will be facing another $1 billion budget deficit year.
Alaska’s notorious boom-and-bust economy hasn’t really cycled like that that for the last 60 years, writes economist Neal Fried. Instead, he said, Alaska has weathered four recessions since statehood in 1959 while the nation as a whole has suffered six such economic setbacks.
He marks 2015 as the start of the last recession, but the state began bleeding residents a full two years before than in 2013, and the state’s generally accepted economic marks of the moment don’t look good.
Alaska leads the country in the percentage of unemployed at 6.2 percent, is tied with Louisiana and Hawaii for the last-place ranking in job growth, and tied with Maryland for last in private-sector job growth. The only bright spot is an uptick in public job growth tied to military expansion and related construction in Central Alaska.
State and local government jobs have been declining slowly but steadily since a peak near 68,000 in 2010, observes Dan Robinson, Labor’s chief of Research and Analysis, but “Alaska still has more government per capita than the nation as a whole.”
That has helped fuel the debate over whether Dunleavy’s attempts to balance the budget are a good thing or a bad thing.
At 8.9 government jobs per 100 people, Alaska is third behind Wyoming, now the nation’s least populous state, at 10.6 per 100, and North Dakota at 9.6. Robinson notes that big states with small populations tend to have the most state and local employees, but the range is wide and with considerable variation.
Vermont, the nation’s second least populous state, has only 7.9 state and local employees per 100, and Texas, the nation’s second-largest state, is near the national average of 6.1.
“About two-thirds of all state and local government jobs nationwide are connected to education,” Robinson wrote, but the rate is less than half in Alaska where 4 per 100 in education is close to the Texas rate of 3.9 per 100. The Texas rate appears to reflect that state’s many inefficient rural schools, something it shares in common with Alaska.
The 4.9 per 100 non-education state and local government employees in Alaska is essentially the same number as in North Dakota, and Wyoming is only slightly higher at 5.5. Robinson notes “the top five states in this category all depend heavily on natural resources and oil in particular.”
It is not clear, however, whether that requires they hire more employees or simply have more money to spend on hiring. The states with the most employees per 100 also appear to hire more and pay less.
Wyoming, North Dakota and Alaska are all below the national median average for state employees – $60,751 per year – and local employees – $51,515 per year. Alaska pays the best of the three states, but can’t begin to match California’s nation-leading, average wage of $80,316 or Hawaii’s local leading average of $70,708.
Whether Alaska has too many or two few public employees, and whether they are overpaid or underpaid, can be debated at length. What is true of oil taxes is also true here as Robinson observes:
“Whether Alaska still has too many government jobs is a policy question rather than something these numbers alone can determine, but it’s clear that Alaska has become considerably leaner over the last eight years.”
The most troubling statistic in the October Economic Report might, however, might be economist Lennon Weller’s observation that both the size of the Alaska labor force and the number of Alaskans working (the employment to population ratio) have been shrinking since 2011.
“These two measures identify a state’s overall ability to support its population and its
potential for economic growth,” he writes. “While there’s no ideal employment-to-population ratio, in theory, more people working relative to the size of the population
leads to greater wealth. A lower employment-to-population ratio suggests a greater burden of support on those working and less ability to meet a population’s needs.”
The Alaska labor participation rate long topped the national average, but that ended in 2018. Part of the reason is obvious; baby boomers aging out of the job marketing. Alaska used to be a place people left when they retired. That is not necessarily the case anymore.
Almost one in 10 Alaskans of working age is now older than 65, and that number is expected to nearly double by 2030. More trouble, Weller wrote, is the decline in young Alaskans and their absence from the workplace.
“Alaska’s population ages 16 to 19 decreased from 43,369 to 37,453 between 2011 and 2017. At the same time, their labor force participation rate dropped from 50.7 percent to 42.5 percent,” he wrote.
Olders Alkasans helped to fill the gap in the job market by “working longer than past
generations, whether by choice or economic necessity….But working older can only go so far, so this buffer isn’t sustainable. In the not-too-distant future, this mitigating factor will disappear and, if nothing else changes, the labor force participation rate will fall even lower.”
Basically, the portrait here is of an economy ever so slowly but steadily cycling downward despite recent claims of 0.01 percent job growth. It’s not a pretty picture. And the state needs to have a good debate about whether increasing taxes on oil will make it better or, possibly, a lot worse.