Alaska squeaked back in front of California in September to regain its position as the nation’s sixth-largest oil producer, but as U.S. oil production has grown in this decade it is stunning what a small player the 49th state has become on the national stage.
September’s northern production of about 13.5 million barrels was a significant increase from August production, according to the U.S. Energy Information Administration (EIA), but it was less than a tenth of the production of Texas, about a third of the production of North Dakota and about half of New Mexico.
Late and iconic Gov. Jay Hammond’s long-ago observation of Alaska’s role as “oil barrel to the nation and national park to the world” is now down to the latter. The implications for the Alaska economy are large.
Visitors to the state’s national parks contributed $1.4 billion to the state economy last year, according to National Park Service estimates. That looks like a big number, but it is a tiny fraction of the revenue generated by the oil industry, and tourists yield the smallest of tax revenues.
Tourism-related taxes support the Denali Borough – home to the world-famous Denali National Park and Preserve which generates more than 65 percent of park visitor spending – but there is no statewide tourism tax.
The more than $2 billion the oil industry contributed last year is $600,000 more than the entirety of the revenue generated by park tourism. Oil money helps fund infrastructure for that same tourism industry, and underwrites the costs of managing the state-subsidized commercial fishing business.
Commercial fishing, the state’s second-largest employer behind tourism, costs the state significantly more to operate than it generates in tax revenues, and the tourism industry doesn’t quite break even for the state, according to the University of Alaska’s Institute of Social and Economic Research (ISER).
The mining industry does better; it “brings in about six times more than the state spends to manage it,” according to the ISER report. But the industry is small. Its $82 million net contribution to the state is peanuts compared to oil revenue.
Not to mention that mining is not particularly popular in Alaska.
To greater or lesser degrees, the downward pressure of negative popularity applies to almost every industry except commercial fishing which was enshrined as special in 1972 when voters amended the Alaska Constitution to create a special class of “limited entry,” commercial permit holders “to prevent economic distress among fishermen and those dependent upon them for a livelihood and to promote the efficient development of aquaculture.”
Eighteen years later, the potentially most profitable form of aquaculture – salmon farming – was banned in Alaska because the state’s commercial fishermen feared fish farms would undercut the market for wild fish and once again cause economic distress among fishermen.
The world, unfortunately, ignored the ban. Salmon farming exploded in Norway, Chile and elsewhere. Today, the farmers produce more than 70 percent of the salmon consumed in the world and set the base market-price.
Thanks in part to a warming ocean, Alaska’s wild salmon production has been on an upward trajectory, allowing fishermen to make up in volume for what they lost in price due to the boom in farmed salmon. But there is almost nowhere to go now but down for Alaska production while farmed fish numbers are only expected to keep increasing.
Rabobank, Dutch-based bank specializing in international food and agriculture financing, last year reported the aquaculture business had grown by $100 billion in the previous six years and projected another $100 billion increase in the next decade.
Alaska, meanwhile, lacks any growth industry other than tourism, and there are always Alaskans grumbling about “too many tourists.”
“We don’t agree about what kind of development we want,” economist Gunnar Knapp, professor emeritus ISER, noted in a powerpoint presented at a conference in November. “Almost every Alaska resource development opportunity – oil, mining, logging, cruise ships, sport fishing lodges, fish farming – is opposed by at least some local residents or other resource users who prefer to keep things as they are.”
A look back
Before Congress finally granted Alaska Statehood in 1959, the biggest concern among federal lawmakers was that the state big on land but short on people might prove unable to sustain itself. A significant oil find in Cook Inlet in the ’50s helped ease that concern to push statehood forward, and when the mammoth Prudhoe Bay oil field started pumping oil through the Trans Alaska Pipeline System in 1977, everything changed.
By the late 1970s with the national crisis caused by the Arab Oil Embargo of 1973-74 still clearly in the nation’s rearview mirror, then Alaska Commissioner of Natural Resources Bob LeResche was joking about Alaskans as the new “blue-eyed Arabs of the north.”
Over the decades to follow, the state collected tens of billions of dollars in oil revenues, grew state government, poured cash into civic centers and schools across the state, fixed its few roads, tried to diversify its economy, and grew a Permanent Fund now worth about $65 billion.
It was once hoped the fund could support the state, but it’s becoming increasingly obvious that it cannot close the gap between shrinking oil tax revenues and state spending, let alone cover that gap and pay Alaskans what has come to be a cherished permanent fund dividend, a share of the state’s oil wealth as Hammond and others called it.
The conservative Alaska Policy Forum calls Gov. Mike Dunleavy’s proposed, $4.5 billion dollar budget for fiscal year 2021 “unsustainable,” citing plans for a nearly $2.5 billion dip into state savings to make the plan pencil.
What other solution might be possible is unknown. Neither new taxes nor budget cuts are popular in the state. Dunleavy tried to make significant cuts in the budget last year only to see a campaign launched to recall him from office.
Given the fiscal problem, efforts are now underway to put an initiative on the 2020 ballot that would increase oil taxes to produce more revenue for the state. The long term consequences are unknown with initiative critics arguing a tax increase will continue or accelerate the decline in oil production by discouraging investment in the 49th state, and initiative supporters arguing that’s all a big bluff designed to scare Alaskans away from collecting their “fair share.”
BP, the third-largest, publicly traded oil company in the world and a leader in developing Alaska North Slope oil from the 1970s on, is already in the process of pulling out of the state. A bureaucratic behemoth that needs to generate huge profits to feed itself, BP decided the returns on its Alaska operations had shrunk to the point it couldn’t afford to stay.
Whether that portends similar decisions by other oil producers if taxes increase is impossible to know, but everyone familiar with the oil industry agrees there are cheaper places than Alaska to produce crude these days. Technology that expanded the reach of oil production in the Lower 48 appears to have brought to Alaska’s oil patch the same problems that have always hampered industrial and manufacturing development in the state.
As Knapp, put it, “Alaska faces significant economic development challenges:
- “Alaska is a high-cost place to do business.
- “It’s hard for many kinds of economic activities to be competitive with
other places that have: lower labor costs, better infrastructure, larger internal markets (and) lower transportation costs to world markets.”
A new path?
There aren’t any other places in the world where you are liable to encounter a wild grizzly bear during a day hike before attendance at the evening’s opera.
Recognizing technological research and development as a big driver of global economies, Gov. Mike Dunleavy made a pitch to Tesla to bring production of its proposed, battery-powered cybertruck north to Alaska.
“It is difficult to deny that Tesla and Elon Musk are now being perceived as a potential economic booster for areas where its facilities are located at,” reported Teslarati.com.“Reno, Nev., for example, is seeing businesses come to the area due to the presence of Gigafactory 1. A facility that produces electric cars in Alaska will likely have the same effect.”
A Tesla move to Alaska, however, seems most unlikely.
Dunleavy, a Republican, might have done better to ask fellow Republican President Donald Trump to back development of the Anchorage metro area as the nation’s first tech “growth center,” an idea being pushed by Brookings, a well-known think tank.
“The future of America’s economy lies in its high-tech innovation sector, but it is now clear that the same sector is widening the nation’s regional divides – a fact that became starkly apparent with the 2016 presidential election,” Brookings concluded in a report issued earlier this month.
“Based on ‘winner-take-most’ network economies, the innovation sector has generated significant technology gains and wealth but has also helped spawn a growing gap between the nation’s dynamic ‘superstar’ metropolitan areas and most everywhere else.
“Neither market forces nor bottom-up economic development efforts have closed this gap, nor are they likely to. Instead, these deeply seated dynamics appear ready to exacerbate the current divides.”
Brookings suggested Congress propose a set of metropolitan areas to be endowed with a “major package of federal innovation inputs and supports that would accelerate their innovation-sector scale-up.”
In the Brookings view, growth centers backed by “substantial financial and regulatory support for 10 years to become self-sustaining new innovation centers…would not only bring significant economic opportunity to more parts of the nation, but also boost U.S. competitiveness on the global stage.”
Though Brookings’ pitch was to Congress, there is no reason the executive branch couldn’t lead a charge to funnel funds into a historically red state in the name of not only economic but political diversity.
As Brookings points out, tech is now concentrating in a handful of “superstar” megapolises all of which happen to be blue.
“Most notably, just five top innovation metro areas – Boston, San Francisco, San Jose, Seattle, and San Diego – accounted for more than 90 percent of the nation’s innovation-sector growth during the years 2005 to 2017,” the study said. “As such, they have increased their share of the nation’s total innovation employment from 17.6 percent to 22.8 percent.
“In contrast, the bottom 90 percent of metro areas (343 of them) lost share. As a result, fully one-third of the nation’s innovation jobs now reside in just 16 counties, and more than half are concentrated in 41 counties.”
Bust, bust and bust
There is, of course, no guarantee a regional growth center in Alaska would work any better than past government attempts at economic expansion in the cold, dark north.
“The federal and state governments have a generally poor track record in creating sustainable, profitable private-sector industries in Alaska by spending money,” Knapp observed. “Businesses which need government support to get started often need government support to keep going.”
But that doesn’t mean a new effort isn’t worth a try in a state where the sector of the economy that long supported almost everything is fading.
Had California production not slumped slightly in September, Alaska would have remained the nation’s seventh-largest oil producer as it was in August behind the three aforementioned states plus Oklahoma, Colorado and California.
Most of them are upping production while Alaska production has flatlined.
Despite slumping global oil prices, the EIA “expects U.S. crude oil production to average 13.2 million barrels per day (b/d) in 2020, an increase of 0.9 million b/d from the 2019 level. Expected 2020 growth is slower than 2018 growth of 1.6 million b/d and 2019 growth of 1.3 million b/d. Slowing crude oil production growth results from a decline in drilling rigs over the past year that EIA expects to continue into 2020. Despite the decline in rigs, EIA forecasts production will continue to grow as rig efficiency and well-level productivity rises, offsetting the decline in the number of rigs.”
Growing U.S. production is in turn expected to keep oil prices relatively low despite planned reductions in oil production by members of the Organization of Petroleum Exporting Countries (OPEC), according to the federal agency. The U.S. is not an OPEC member but in September became for the first time a net oil-exporter.
“The United States exported 90,000 b/d more total crude oil and petroleum products in September than it imported,” the EIA reported. “This is the first month recorded in U.S. data that the United States exported more crude oil and petroleum products than it imported” since 1973.
The shift marked the crossing of trend lines which have shown U.S. oil exports growing since 2009 as U.S. oil imports shrank. U.S. production shot up from 5.3 million barrels per day in 2009 to 12.1 million barrels per day through September 2019, according to the EIA. The U.S. production helped boost global supply.
And that’s just more bad news for Alaska. Because of lower prices, the state is now looking at only about $1.5 billion oil royalty and tax revenue in 2020, according to the revenue source book.