Sixty-three years ago, oil made Alaska. Now, as global markets retract, the time appears to be approaching to wonder if oil will unmake the 49th state.
Ignore the millions of dollars being spent to convince Alaskans to vote for or against an increase in taxes on the oil industry in the state. No matter the outcome of that vote it may well prove largely meaningless in the bigger nature of things to come.
Markets are powerful influences, and the markets for oil are changing rapidly in the face of a technological shift back to another old energy source – electricity.
And the shift is about a lot more than the growing use of so-called “renewables” to generate power, although they play a role. There are other major tech shifts underway as well.
Take lighting as but one example. The average 60-watt incandescent bulb produced 16 lumens of light per watt; light-emitting-diode bulbs are now producing 83 lumens per watt, a more than fivefold improvement and the U.S. Energy Information Administration (EIA) projects they will soon be producing “more than 150 lumens per watt.”
Similar energy savings are taking and have taken place in everything from home appliances to power tools to how buildings are heated. A study conducted for the Environmental Protection Agency (EPA) by the National Electrical Manufacturers Association in 2001 found that occupancy sensors to adjust lights and heating can cut energy use by 30 to 60 percent in commercial buildings.
Such sensors are now in wide use as are energy-saving thermostats in homes. They help explain a major shift in U.S. oil use.
Back in the 1970s, about 45 percent of it was consumed to power transportation with 65 percent going to other uses. Today the other uses have gained in efficiency or turned to other forms of energy for power, and the ratios have switched.
Sixty-five percent is used for transportation, and transportation is slowly but steadily electrifying as both batteries and charging technologies evolve.
Oil is not going away as an energy source. It will surely stay around as long as anyone reading this is alive. But the law of supply and demand dictates that as demand falls so does price.
This not good news for Alaska, a state heavily dependent on oil production that has seen its oil revenues fall steadily as the volume of state oil production has dropped from a peak of more than 2 million barrels per day in 1988 to 466,000 barrels per day last year, according to the EIA.
That is only 2.4 times what production was in 1973 before construction of the TransAlaska Pipeline System, but Alaska was an entirely different place then.
Back to the future
Alaska was in ’73 a still young state that owed its step up from territorial status largely to an oil discovery only about 15 years earlier.
The year was 1957 when the Richfield Oil Company, the predecessor to the company now known as ConocoPhillips, struck oil on the Kenai Peninsula, and the territory that had been unsuccessfully lobbying for statehood since 1949 was on its way.
Until then, the bad rap on the then 231,000 residents of the remote and frozen north was that they lacked the financial base to support a state. The Swanson River oil find changed that.
“With regard to Alaska’s economic base,” history records, “the discovery of oil in the late summer of 1957 helped the territory leap the final hurdle toward becoming a state. The presence of oil in commercial quantities just outside of Anchorage started an oil rush throughout the Kenai Peninsula. As Alaska’s immense wealth of resources was finally realized, Congress was quickly convinced to disregard past arguments against statehood.”
Still, the small, lightly-populated, young state struggled to support itself. The big change wouldn’t start until an elephant of an oil field was discovered at Prudhoe Bay in 1968.
A year later, the state staged its first big, Arctic sale of oil leases. It was a bonanza.
“Alaska’s state treasury was potentially richer by $900 million (about $6.4 billion in inflation-corrected dollars) tonight as the greatest competitive sale of oil-land leases in the country’s history ended after nine suspenseful hours,” the New York Times reported on Sept. 11, 1969.
Overnight the decade-long worry that Alaska wouldn’t be able to support itself as a state was over. Suddenly the state of then less than 300,000 people was rich and poised on the cusp of monumental change.
The Alaska state budget was in 1970 approximately $219 million or about $1.47 billion when corrected for inflation. The George Parks Highway connecting the state’s two largest cities – Anchorage and Fairbanks – had yet to be completed.
The newly formed Matanuska-Susitna Borough was home to only 6,500 people. No one was commuting to Anchorage on the rough, then two-lane Glenn Highway. The now-vibrant suburb of Eagle River was a wide spot in the road with 2,500 people spread out throughout the forest in four directions.
State health and social services programs were minimal. Federal Medicaid was still new. State operating costs were for these reasons low and largely covered by a state income tax that required Alaskans pay the state 16 percent of their federal income tax liability.
Today the state budget for the Division of Health and Social Services is $3.1 billion – nearly twice the inflation-corrected budget for all of state government in 1970. The budget for the Department of Education and Early Development is $1.7 billion, more than the inflation-corrected budget of 1970.
Overall, with all figures corrected for 2020 dollars, state expenditures grew from $4,900 per resident in 1970 to $13,760 per resident today because Alaskans wanted expanded health benefits, better schools, better roads and more.
Oil helped fund nearly all of this with funds from lease sales, royalties on oil production, and taxes on oil company profits. The state income tax was eliminated in 1980 along with an annual $10 fee dedicated to helping cover education costs.
So much oil money was rolling into the state by 2008 – with global oil prices over $100 per barrel – that then Gov. Sarah Palin, later to become a national polebrity as a conservative proponent of lower government spending – convinced the Legislature to send every Alaskan – including babies and children – $1,200 to offset the rising costs of fuel.
Now Alaska is looking at daily production of less than 500,000 barrels of oil worth $40 per barrel to support it the way about 700,000 barrels per day at $150 per barrel did in 2008.
With production down near 30 percent and value down fourfold, the numbers just don’t work no matter how Alaskans vote on upping taxes on oil.
Still, no matter what the industry is publicly saying now, it can afford the tax increase. How the increase might influence industry decisions on exploration and new production going forward is another matter altogether.
Alaska, because of its extremes of climate, is already a costly place to operate, and neither the short-term nor long-term prospects for oil prices look good.
The International Energy Agency is expecting 2020 to end with oil demand down 8 percent due to the COVID-19 pandemic.
“‘….A prolonged pandemic causes lasting damage to economic prospects,” it adds. “The global economy returns to its pre-crisis size only in 2023, and the pandemic ushers in a decade with the lowest rate of energy demand growth since the 1930s.”
This is the organization’s “delayed recovery scenario” (DRS) that looks ever more likely with COVID-19 cases climbing rapidly in both the U.S. and Europe.
“Prior to the crisis, energy demand was projected to grow by 12 percent between 2019 and 2030,” the organization’s World Energy Outlook 2020 report says. “Growth over this period is now…only 4 percent in the DRS. With demand in advanced economies on a declining trend, all of the increase comes from emerging markets and developing economies, led by India. The slower pace of energy demand growth puts downward pressure on oil and gas prices compared with pre-crisis trajectories.”
Oil demand will return to the 2020 level by 2025 and continue to grow after, the Outlook forecasts, but a return to the good-old-days of sky-high demand driving prices ever higher does not appear to be in the cards.
“The era of growth in global oil demand comes to an end within ten years, but the shape of the economic recovery is a key uncertainty,” the Outlook says.
In both the model for a quick recovery and “the DRS, oil demand flattens out in the 2030s,” it says. “However, a prolonged economic downturn knocks more than 4 million barrels per day (mb/d) off oil demand in the DRS keeping it below 100 mb/d.
“Changes in behavior resulting from the pandemic cut both ways. The longer the disruption, the more some changes that eat into oil consumption become engrained, such as working from home or avoiding air travel. However, not all the shifts in consumer behavior disadvantage oil. It benefits from a near-term aversion to public transport, the continued popularity of SUVs and the delayed replacement of older, inefficient vehicles.”
The Outlook expects oil demand to plateau in 2030 rather than begin a decline, but even a plateau is sure to make oil investors and companies more reluctant to take risks on expensive and marginal developments while renewables continue to grab energy market share.
The Outlook puts solar at the center of a “new constellation of electricity generation technologies. Supportive policies and maturing technologies are enabling very cheap access to capital in leading markets. With sharp cost reductions over the past decade, solar PV is consistently cheaper than new coal- or gasfired power plants in most countries, and solar projects now offer some of the lowest-cost electricity ever seen.”
Dark and visionless
Alaska with its six months of limited sunlight is not the ideal place to harvest sunlight for electricity. It does have significant potential for hydropower, wind and cheap natural-gas fired electric production, but without an Ultra High Voltage (UHV) link to the rest of North America, the state has no way to market surplus power, and no one has offered any idea on how to use the power in-state to grow the Alaska economy.
It would appear possible to tie Alaska into the North American grid – China in January powered up a 2,046 mile UHV line – but there has been little talk of UHV in Alaska despite North Slope oil companies and the state sitting on vast and, at this point unusable, supplies of natural gas on the North Slope.
It is just over 1,600 road miles from the North Slope to the northern end of the B.C. Hydro power grid at Bob Quinn Lake, British Columbia, Canada. Residents of Whitehorse, Yukon Territory have sometimes talked about trying to tie into the grid.
But the capital resources of the Yukon are small. It has no oil wells pumping out hundreds of millions of dollars in revenue, and the 186,000-square-miles of territorial wilderness is home to but 42,000 people – less than half the 98,000 of the Fairbanks North Star Borough.
Preoccupied for decades with the idea of moving North Slope gas to port via a gasline, Alaska has never considered the considerably cheaper costs of supplying UHV electricity to the state or beyond.
The Outlook does see a much higher demand for natural gas than oil going forward, particularly as countries in Asia struggle to replace air-fouling, coal-fired powerplants with cleaner producing sources of electricity. But it warns that the “uncertain economic recovery…raises questions about the future prospects of the record amount of new liquefied natural gas (LNG) export facilities approved in 2019.”
The Alaska LNG Project is one of those approved projects, but with an estimated cost of $43 billion, it has attracted no investors, and there are no expectations it will.
The Alaska natural gas pipeline looks to be deader than the proposed Pebble Mine, a copper-mining project hated by both environmentalists and commercial fishermen, one of the state’s most influential political entities.
The key Alaska industry of another age, fish processors once provided 80 percent of the territorial budget. Today, fish taxes barely pay the costs of managing and policing the fishing business.
The state’s Spring 2020 Revenue Forecast projected fisheries revenues at just over $20 million for 2021, about the same amount of money as was expected to be collected in alcohol taxes and about 53 percent of the revenue expected from tobacco taxes.
The “Insurance Premium Tax” was expected to net the state about three times as much, the corporate income tax (paid primarily by oil companies) about four times as much, petroleum taxes more than 13 times as much, and combined oil and gas taxes and royalties more than 35 times as much in unrestricted general fund revenue.
But those latter revenues are a fraction of what they once were.
What is really keeping the state afloat now is investment income off past oil savings which is projected to provide about $4.2 billion in 2021 and federal revenue to the tune of $4.3 billion.
Still, oil industry taxes and royalties that total more than $1 billion in restricted and unrestricted revenue are a vital part of state-funding, and they appear headed steadily downward with global oil demand depressed and production from the North Slope continuing to slow.
The proposed new tax could bring in about $250 million, and no matter what television advertising might suggest, the oil industry isn’t going to cut and run the way Kennecott Mines did long ago if it passes.
There’s still considerable money waiting to be pulled from beneath the ground at Prudhoe Bay, but the tax vote could alter decisions on future Alaska investments and accelerate the decline in Prudhoe production.
That would only add to the state’s current fiscal problems.
As Brad Keithley notes at Alaskans for a Sustainable Budget, the state is looking at deficits of around $2 billion per year going forward. An advocate for the oil tax initiative and a flat tax on income, he also admits that not even a combination of the two can cover the budget shortfalls.
Unfortunately cutting state spending is even harder than boosting state taxes, which leaves the state high-centered in a politically polarized world where compromise has become a dirty word.
The left cannot bear the idea of cuts. The right cannot bear the idea of taxes increases. And there the state sits as the global oil situation makes the problem slowly but steadily worse.
The picture is not pretty, and the more oil production declines, the worse it’s going to get. It’s enough to make one wonder if Alaska after the black gold rush could start to look like Alaska after the historic Gold Rush when almost half the residents of the territory took a ship south, according to a state Department of Labor study.
That would be one way to help reduce state spending.