Commentary

Black gold decline

Prudhoe Bay, Alaska’s aging golden goose/Wikimedia Commons

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.

Energy consultant Wood-Mackenzie forecasts U.S. sales of electric cars and hybrids will top 1 million by 2025, the year it also projects “global oil demand declines.” 

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.

Village high schools existed in only a handful of the state’s rural communities. Most village students had no choice but to go to boarding schools after ninth grade.

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.

A year later, Palin abandoned Alaska to pursue bigger political ambitions. Five years later, oil prices began a long slide, rebounded somewhat, and then crashed.

Financial realities

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34 replies »

  1. I don’t think it is fair to say that Kennicott “cut and ran.” There is a better argument that they were simply harrassed out of Alaska in the same way that the oil industry is being harassed out. Anytime “baby needs new shoes” Alaska changes the taxation and regulatory regime. There are much friendlier places in the World. Give Tower’s “Icebound Empire” a read, if you haven’t. I think Kennicott and the Guggenheims just gave up on Alaska’s populist/socialist politics.

  2. The long and short of it is Alaska has been on the drug called tons of oil money for a lot of years and now is coming down off that drug. The effects of going cold turkey in order to get back to reality can be severe. No one wants to go back to potatoes and carrots when you’ve had candy most of your life, lots of people feel entitled….. Don’t you love that word I deserve , we deserve….. Alaska could be a manufacturing juggernaut Jewel… (I admit logistics are a challenge with Alaska manufacturing) But the easy fast money of oil I believe has prevented most of it from happening.

  3. Perhaps a commentator can help me with this conundrum. Japan and South Korea are manufacturing powerhouses. There is not a home in the United States that does not contain products produced in Japan or South Korea. Yet both those countries are tiny when compared to Alaska. Moreover, neither South Korea or Japan have natural resources to fuel a manufacturing base. Virtually all materials required for manufacturing are imported. So, why is it that Alaska, a state rich in a variety of natural resources, manufacturers virtually nothing? Alaska has boundless hydroelectric opportunities that could power manufacturing. Alaska is globally situated to easily deliver products worldwide. Have years of oil revenue made Alaska so lazy and myopic that we cannot see the forest for the trees (pun intended)?

    • Actually, last year, I read that our abundant and cheap energy and resources allow us to overcome the prior advantages of foreign cheap labor.

  4. Crude oil is down 33% year to date. AK is no longer financially sustainable at this level. Time to get real on other options, if there are any.

  5. I’d like to remind readers that a HVDC (High Voltage DC power-line to transmit power from the North Slope to the Rail-belt WAS in the original plans at Prudhoe bay and was talked about again recently as an alternative to the very high cost of a Gas Line from the North Slope.

    As I understand it, the original power generation idea was scrapped by the owners of the pipeline as it would have made them a Utility as opposed to a transportation company, while also significantly increasing their taxes. The money was also spent to do the engineering work to use waste heat off of the exhaust stacks of the jet engines, which powered the crude pumps at Pump Station 8, and is common practice in more populated areas. As well there are valves in the mainline pipe near the Terminal in Valdez which were meant to divert the crude oil through a power recovery turbine much like you’d find at the bottom of a hydro electric dam. This would have generated power for the terminal as well as the city of Valdez but was never completed.

    In todays political climate you’d like to think that a provider of low cost energy would be able to get a waiver for things like that as it seems to make good sense but we must also remember that the VP of the US ended up casting the deciding vote on the Permit to build the Pipeline in the first place.

    Lets be very careful and consider the implications of how we vote!!!

  6. And yet I would love to return to the Alaska of ‘75 🙂
    Frankly, a progressive State income tax would be more than able to generate ~$2B as long as it eschews relying on federal tax returns and the loopholes those returns provide. And if anyone wants to turn off the pipeline, then they will immediately be on the hook for the billions in remediation that were not escrowed, nor would there be any reason for Alaska not to go after BP, after liquidating Hillcorp for pennies on the dollar.

    But the cost of subsidizing thousands of BigOil vampires will also disappear with and disappearing oil companies, and we will suddenly have safer streets with 12’ bike lanes !!!

  7. “No one was commuting to Anchorage on the rough, then two-lane Glenn Highway.”

    My grandfather used to commute from Big Lake in the 60s. Anchorage or Sutton. IDK for how long, he ended up working for Fishers Fuel.

    • Thanks KM. For every rule, there is an exception. In every population, there is an outlier. Your grandfather must have been tough. It’s hard to imagine anyone daily driving from Big Lake to Anchorage in the ’60s.

      I drove from Wasilla to Anchorage for the first time in ’73, and it was a looooooooooong drive then. Muldoon, now part of Anchorage, was a little town quite a ways outside the “city,” which wasn’t much of a city.

      • I knew an old timer that used to carpool construction guys from Wasilla to base during WW2. He said he made more money charging for gas than he did working.

  8. The problem with Alaska running as a “Banana Republic” is that more money leaves the state then stays here for investment (and that has always been the case).
    Look at the Kennecott mine, Hatcher Pass mine (34,000 ounces of gold), Kensington mine, red dog mine, fishing industry, logging industry, oil industry, etc.
    When you allow international corporations to export your resources for pennies and allow thousands & thousands of their workers to earn a living in AK without paying income tax then here you have it…..a failing economy by corporate lobby design.
    On a brighter note, regardless of who gets in the white house for next year, I would load up on Tesla stock for your portfolio in 2021 since E.V.’s are here to stay and Tesla’s large capacity battery banks are in high demand right now across the country.

      • Marlin,
        silver is good…most silver backed commodities saw around a 30% gain this year, but Tesla stock has climbed over 400 percent in 12 months…now that is some good return on your investment!

      • Actually, Steve, earlier this year, the silver to gold ratio was 130 to 1. Since Roman times, the ratio has been usually nearer 40 to 50 to 1. I felt that was a screaming buy for Junior Mining penny stocks. I told my friends and jumped in with both feet. My YTD+ (323.87%). This number includes two total losses and several 400% to 600% winners. I’ve chosen to wait to sell for two reasons: One, I feel the metals will go much higher due to debt and hyperinflation. Number 2, the difference between long term capital gains and short term capital gains taxes. The only caveat is Biden’s plan for a wealth tax. Over 70 stocks is much better than putting it on just one stock(Tesla); plus the stocks include rare earth ,diamonds, and other metals besides silver and gold.

      • Marlin,
        Sounds like some sound advice…I never thought of picking 70 at a time but I guess that really diversifies your risk. I will definitely check out some rare earth stock options and ETF’s after the election madness ends. You are braver than I am sticking it out through the election cycle as I predict that this will be a similar contested election to 2000. Then it was the “hanging chad” and this time it will be the “naked ballot”. The stock market already saw the blue chips fall nearly 2% today and I believe this may last well until we have a winner declared. Back in 2000 the S&P fell almost 10 percent and the Nasdaq fell 24 percent until a decision was finally made by the supreme court.

      • Steve, I’m counting on higher metal prices due to debt and hyperinflation. That means I expect the general stock market to tank and miners to surge……. If I’m wrong, I’ll give them to my Daughter. She’s young enough they may do Her some good.

    • TSLA? Where ya been the past year? Stock was on a tear. I wouldnt own an electric car, but whatever floats the boat.

    • Steve,
      Not that it shouldn’t be different, and maybe someday it will, but corporations have been putting a straw to Alaska since the Russians showed up.
      Little known factoid with regards to Kensington,the Chinese financed a good chunk of the mine with Cour'( I want to say 49%,but don’t remember now).
      Unless things have changed, they take there cut in 40ft connex vans stuffed with 40k lb super sacks of concentrate gold ore, rather than electron $’s

      • Dave,
        That is interesting that the CCP is half owners in the Kensington mine…these are the types of stories that never seem to make ADN.
        We are giving our resources away for peanuts while the AK leg focuses on re-election year after year…
        Why can’t the PF fund any of these types of operations in AK?
        This is the real billion dollar question.

      • Dave: Well, as Alaska economist Gunnar Knapp once put it to me when I asked his opinion on why this state looks so much like a colony:

        “Because a lot of people like it that way.”

  9. Sure the oil companies won’t “run away” if taxed more. But like they did earlier during the pandemic, when the price of oil dropped to single digits, they will cut or pause production when the economics don’t make sense to operate. More taxes means more reason to cut production. And the state is the big loser when the oil companies send less oil down the pipe.

    And with current low volumes of production, if either ConocoPhillips or Hilcorp were forced by economics to switch off … all North Slope producers would have to shut down. Because there would be too little volume for TAPS to work. TAPS was made for 2 million plus BPD not a tenth of that. Nothing in TAPS, no cash for AK.

    Another error in your logic is PF earnings paying a big chunk of Alaska’s bills. Earnings are market driven. WHEN the market descends to reality … there will be much less earnings.

    So here is an idea … why doesn’t the state restructure and cut costs? That’s what people in the real world do when money gets tight.

  10. What will really change things for electrical generation, here in Alaska and throughout the entire world, is energy storage. Virtually all renewables are unreliable and do not generate to the full capacity when they do generate. Being able to store and reliably use this unreliable in a reliable manner will be done through energy storage systems that can store and dispense this energy when required and as needed. Grid scale energy is happening now and will continue to grow. Alaska has the ability to generate more renewable hydro, geothermal, and tidal power…solar and wind could be incorporated with a large enough storage system.

    Interesting that peak oil will likely not be reached because of supply, but because of demand, as was the claim for decades from the peak oil crowd.

  11. Great summary. I would offer that high voltage DC has been promoted by AVEC/meera Kohler – there are some interesting reports from CWN. I’d also suggest watching the work of Launch Alaska. Ky

  12. Few notes when you say “particularly as countries in Asia struggle to replace air-fouling, coal-fired powerplants with cleaner producing sources of electricity. ”

    This simply is NOT the case. That is lefty “feel good” site promoting the Chinese lie.

    China’s “economic miracle” has seen the country become the world’s second-largest economy and pulled nearly a billion people out of poverty. But this progress has been built on a boom in energy from coal, meaning China has also become the world’s largest carbon polluter by far.

    China’s CO2 emissions increased again by around 2% in 2019, based on recently released official economic data, and 65% of the annual growth in energy consumption came from fossil fuels.

    Coal is the most carbon-intensive fossil fuel and still accounted for 57.7% of China’s energy use in 2019, the data shows.

    Alaska, sad to say, reminds me of any Democrat controlled inner city that has grown dependent on government handouts. The vote is dependent on which candidate offers the most “free” cheese. In this case a cup of black “coffee” (PFD $$$).

    Also, when using all these energy saving devices in your house (bulbs, thermostats, etc..) have you EVER noticed a decrease in your bill?

    • And you just wait, most of the good people with their hands out will vote for Biden.. Team Democrats are always “good” for cost effective energy solutions (oil, gas, etc..). The “Green New Deal”. Now there’s a “winner”.

    • Bryan: I think you just underlined my summary of the “struggle to replace air-fouling, coal-fired powerplants.” China is still burning a lot of coal.

      It’s not by choice. Their air is horrible which drives up health care and other costs. But coal is cheap and they need the energy. That doesn’t change the fact they are trying to get off it, and that effort has and will affect markets.

      Unforutnately, we’re stuck downwind from them until they clean up.

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