Alaska has thus far avoided the immediacy of the impact of the recession arising from the outrageous mismanagement of our financial sector. The reason for this is that most of the money in this State from oil revenues goes to the State, and then is trickled down to the communities through welfare and public works projects. A process where the governor and the Legislature compete for dwindling funds to promote their respective reelections through oil revenue largess to their constituency.
In his endorsement of offshore drilling, Gov. Sean Parnell mentioned that he wanted the ‘billions’ in wages and services for Alaska’s economy that would be generated by private sector companies which would be supporting companies like Shell in pursuing offshore oil and gas deposits. This is a radical departure from the ‘it must all come to the State first’ approach of the post TAPS construction era: 1978-present.
The question during the Jay Hammond Administration was ‘how best to benefit Alaskans from the oil wealth from the royalties and taxes’ on the North Slope development. It was decided that to give Alaskans the most benefit, the mechanism of a Permanent Fund was created. This fund was to accomplish two goals. One was to distribute a benefit to Alaskans from the oil wealth through the mechanism of the earnings of the Permanent Fund through a dividend program paid out yearly based upon a percentage of the earnings of the Permanent Fund. The Permanent Fund itself was established to provide for a time when revenues from oil production fell to such a level that State and local government would need help in meeting services. The PF was a rainy day fund.
The revenues that did not go into the Permanent Fund were used to fuel a State government that quickly demonstrated that it was incapable of restraining itself when it came to overspending. This tendency was adopted by local governments.
Former Gov. Jay Hammond and the Legislature at the time never intended for the Permanent Fund Dividend checks to individual Alaskans to go on forever. It was intended that the program would be terminated when revenue from oil fell to such a level that ending the PFD program would be necessary. The alternative was to tax the PFD so that government gave and then recouped that benefit through taxes.
Since Hammond’s administration in the late 1970s, the largess from oil revenues fuel a growth of State and local government that is unparalleled elsewhere, given the low population of the State of Alaska—approximately 650,000.
With this program, revenues were no longer generated at the local level; everything came from the State to the communities. This new super welfare state mentality soon extended itself beyond oil and gas into the mining sector.
The Mining Law of 1872 provided for a requirement for $200 in development and exploration to be accomplished on the mining claims, state or federal, each year. Congress and the State amended the law in the mid-1980s to allow a payment per acre in lieu of the development work. The $200 was something spent directly to the benefit of many Alaska communities for services and labor. Now, a company or individual with mining claims pays $2 per acre per year for each mining claim directly to the State without having to do anything as far as developing or “proving’ the claims as being viable. This has led to big companies coming into Alaska and simply claiming all around a promising prospect and eventually, through water rights issues, and other mechanisms freezing out the small claimholder.
Payment directly to the State bypassed the community benefit and is slowly eliminating the little guy in Alaska’s mining industry.
The picture is now of a State government from which all monies from resource development flows downward to the localities from the State. Yearly state budgets are upwards of $8 billion with federal sharing funds.
What are the indicators of any recession in Alaska?
For the last 5 years, residential and commercial construction have slowed by as much as 30% per year for new construction starts.
Alaska’s entry into the recession has been relatively slow compared to other States, because of our oil revenues. Oil production is declining, however, and sooner or later even high oil prices will not produce the revenue that was once enjoyed by the State government from North Slope oil development.
Parnell’s speaking of direct benefits from wages and business reflects an awareness of the potential impact of oil and gas offshore exploration and development to Alaska’s economy and communities. Obviously, the communities closest to the development will benefit the most. It is these Alaska coastal communities that are in need of such development. One only has to look to Kotzebue and its relationship with the Red Dog mine to see potential benefit.
It is even possible that Alaska might see a rise in oil field support businesses to support increased oil and gas exploration offshore. This gives Alaska the opportunity to benefit in much the same manner as have the western Canadian provinces from the oil and gas development there. Alaska would be in the position to redevelop a bottom up economy, reducing the focus on the current top down, mother state.
What is it that can accelerate Alaska’s descent into an economic depression, the likes of which has not been seen since the post TAPS construction ended? Alaska’s tax structure on the oil industry.
With the completion of TAPS back in late 1977, people working on the project left. Property values plummeted. Unemployment in the Matanuska Valley where I grew up peaked at 26%.
Most of our Legislators are post that experience and lack the perspective that those of us where there and experienced this time possess. Hence, they act as if there is not derogative to Alaska’s economy with their oil and gas tax policies.
The harbinger of what’s to come is British Petroleum’s very recent announcement of serious cutbacks on the North Slope amounting to a major slow down of activity for this company. It has reported that the decrease in spending by BP is going to be $100,000,000 or greater this year. BP has given notice to its subcontractors that they will have to reduce their contract costs or risk losing their work.
Gov. Sean Parnell needs to change the paradigm of taxing the oil companies in Alaska, if there is to be any real “black gold rush” for Alaska’s offshore potential. To do that, he needs to give the Legislature a reality check that the good old days of 1.2 million barrels per day flowing down the Trans Alaska Pipeline to market are gone forever if something does not change and change quickly.
Parnell has the lesson to be learned from Albert, Saskatchewan, and British Columbia with respect to envigorating Alaska’s oil and gas development.
Parnell has a valuable tool in the Alaska Natural Gas Development Authority. Hopefully, he will not let his predecessor’s rhetoric and open hostility towards the oil companies in Alaska guide his policy decision. Otherwise, Alaska’s economy will “tank” and make post TAPS look like a picnic by comparison.
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