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Discovery fuels economic transformation Experts point to Prudhoe Bay oil field as enduring backbone of Alaska’s public, private funding sources and future economy Nancy Pounds For Petroleum News
Alaska’s economy would be much different without the discovery and development of Prudhoe Bay. Economists, industry officials and prominent Alaskans say the economic effects of the state’s major oil discovery are far-reaching and dramatic. That one event, in fact, has proven to be the spark for an economic transformation of the 49th state.
Prudhoe Bay’s discovery and subsequent production touch every Alaskan today in the form of the annual Permanent Fund dividend, paid from a public savings account created with oil revenues paid to the state.
Terrence Cole, a history professor at the University of Alaska Fairbanks, published an article, summarized by the Institute of Social and Economic Research, in 2004 documenting Prudhoe Bay oil’s economic impact.
“Prudhoe Bay oil was worth more than everything that has been dug out, cut down, caught or killed in Alaska since the beginning of time,” Cole wrote. “The discovery of the Prudhoe Bay oil field in the late 1960s fulfilled even the most optimistic dreams for statehood.”
Cole details a fledgling Alaska that was struggling financially, both before and after statehood in 1959. But Prudhoe Bay helped change that scene.
According to Cole’s report, Prudhoe Bay oil exponentially eclipsed the value produced from Alaska’s other resources. “From 1867 to 1958, about $40 billion (in 2002 dollars) worth of fur, gold, copper and salmon came out of Alaska in waves. … But everything that came before pales in comparison with the value of oil. From 1959 through 2002, Alaska produced resources valued at nearly $350 billion. More than 80 percent was from Prudhoe Bay oil.”
Prudhoe Bay launches revenue bonanza The development of Prudhoe Bay led to the development of other North Slope oil fields, said Scott Goldsmith, economics professor at the University of Alaska Anchorage’s Institute of Social and Economic Research.
“If it weren’t for Prudhoe Bay there wouldn’t be anything else going on (on the North Slope),” he said. “It’s hard to imagine Alaska without oil.”
Kevin Banks, director of the state Division of Oil and Gas, agreed. “Without Prudhoe Bay, there probably wouldn’t have been a North Slope (oil industry),” Banks said.
Cook Inlet oil production was under way at the time, but was not a significant economic force, Banks said. The state’s oil industry was a minor factor until the Prudhoe Bay discovery when “then the economy was absolutely transformed,” Banks said.
Also, there would be no trans-Alaska oil pipeline without Prudhoe Bay, he added.
Goldsmith compiled a report in spring 2008 detailing the economic impacts of the North Slope oil industry. In 30 years, the North Slope has produced 15 billion barrels of oil, according to Goldsmith’s research. That volume tallied up to $378 billion — in 2007 dollars — based on value at the wellhead. That would equal 5,400 of BP’s Anchorage high-rise headquarters, based on recent tax assessment of $70 million.
And North Slope oil has landed $118 billion in cumulative revenue to the State of Alaska, Goldsmith cited. One more “billion” is connected to North Slope oil, according to Goldsmith’s report — the value of the Alaska Permanent Fund was $36 billion in mid-summer 2008.
Prudhoe Bay has landed billions of dollars in state government coffers.
“Prudhoe Bay alone has produced roughly $23 billion in royalties (for) the state from first production through December 2007,” said Cody Rice, a petroleum economist with the Division of Oil and Gas. The total is not adjusted for 2008 dollar value, though.
The State of Alaska also received about $27 billion in taxes from North Slope oil fields through 2007, Rice noted.
That’s a total of $50 billion. But how much money is $50 billion?
With that sum, the state could pay annual base salaries of $52,428 to 5,000 Alaska State Troopers for more than 190 years. Or it could underwrite the cost of 500 new 200,000-square-foot Dena’ina Convention Centers, based on Anchorage’s current construction cost estimates of about $100 million each.
Prudhoe paid lion’s share of revenue According to Goldsmith, the petroleum industry contributed 87 percent of state general fund revenue in fiscal year 2007 alone. Thanks to Prudhoe Bay, the state has collected a similar percentage every year for the past 30 years.
This means Alaska’s other industries “have been able to enjoy a very light tax burden,” he said. Also, without the oil industry, Alaska’s other main sectors like fishing and tourism, would be less competitive internationally and would lack infrastructure purchased with oil-industry-infused state funds, Goldsmith said. These effects are difficult to quantify and often overlooked, he observed.
The Alaska oil industry also helps stabilize the state’s work force year-round, so the labor market isn’t skewed by seasonal jobs, and the oil sector adds high-paying jobs, Goldsmith said.
Another way oil development has buoyed the state economy is by what Goldsmith describes as “wealth creation.” The chief component is the Permanent Fund dividend. To quantify the dollar-power of these dividends, Goldsmith said, if all the money distributed as dividends had been placed in a separate pot called “Son of the Permanent fund,” and invested in the same kinds of assets as the Permanent Fund, itself, and all the earnings reinvested, that fund today would be worth $35 billion, almost as much as the Permanent Fund.
“This illustrates the ‘opportunity cost’ of the Permanent Fund distribution that is what we alternatively could have had,” he explained.
That $35 billion would pay out more than 21 million dividend checks, based on the 2007 dividend amount of $1,654.
Prudhoe Bay also lifted a huge income tax burden from the shoulders of Alaskans. The state repealed its income tax in 1980 amid oil industry payouts to the government and has never had to reinstate it. Goldsmith estimates Alaskans would have had to pay an average of 34 percent in personal income tax — since 1970 — to generate the same amount of state revenue for the general fund as the petroleum industry.
Oil revenue fuels projects, industries Division of Oil and Gas Director Banks arrived in Alaska in 1975. He had hitchhiked to Fairbanks, where he found a boomtown economy during pipeline construction. He was intrigued by the dynamics of the economy, returning to the state in 1982 and researching the state’s economic data with Goldsmith.
“It’s been a pretty wild ride,” Banks said of Alaska’s dramatic economic changes.
Revenue to the state climbed drastically between first oil production in 1977 and 1982 — only five years, Banks said. Funds spawned state programs like the Alaska Housing Finance Corp. and construction projects that reshaped communities like the Alaska Center for the Performing Arts and the Sullivan Arena, both in Anchorage.
“We would not have been a state without the discovery of oil on the Swanson River,” said Banks, who has worked for the state since 1991 and served as division director for nearly two years. “We would not be the state we are without Prudhoe Bay.”
Three players active at Prudhoe Bay’s discovery — predecessors to BP, ExxonMobil and ConocoPhillips — are still North Slope powerhouses, he said. Banks now sees other companies pursuing Alaska oil development, and he often recalls policies precipitated by Prudhoe Bay beginnings.
Banks cited spin-off effects of the North Slope oil industry, including a strong service sector supporting the industry. Also, Alaska’s commercial air freight business has grown largely due to available jet fuel manufactured by Tesoro and Flint Hills, Banks said.
A 30-year economic tale Alaska’s economic story from 1977 to the present shows unprecedented changes, peaking with a 1980s boom followed by a late 1980s bust and steady growth and recovery into the new century.
State labor economist Neal Fried detailed the changes in a September 2007 Alaska Economic Trends article, “Alaska’s economy transformed: Thirty years of the trans-Alaska oil pipeline.”
Other industries like tourism, fishing and mining contributed to the state’s economic changes in that era, Fried writes. “But then again, there is little doubt that without the discovery of oil on the North Slope, Alaska’s economy would be vastly different today.”
Fried compared key factors in 1977 and 2007. Alaska’s work force tripled in that time. Payroll going to workers rose from $3.5 billion to $13 billion. The gross state product grew from $8 billion to $39 billion, according to the report. Alaskans generated $5 billion in personal income, compared to $25 billion for 2007. In 1977, 412,000 people lived in the state compared to 670,000 Alaskans today.
“Nearly every aspect of the state’s economy grew at breakneck speed during the first five years of the 1980s,” Fried said. “The biggest boom Alaska would experience began around the same time the billionth barrel of oil came out of the ground in January 1980.” Oil prices doubled that year, and the state’s budget doubled in one year, from $1.6 billion in 1980 to $3.4 billion in 1981.
The spending spree peaked in 1985. “It created a demand for goods and services that acted as the catalyst for the most dynamic expansion of any five-year period in Alaska’s history,” Fried said. In those five years, the population grew by 120,000 — a five-year record that has never been repeated — and the work force increased by 60,000, he wrote.
“This period of hyper-growth would be short-lived, and its aftermath continues to haunt Alaska’s economic psyche,” Fried said.
Oil prices fell and state government cut more than $1 billion from its budget in a year. Real estate and construction industries had outpaced demand and crumbled in the downturn.
“In 1986 and 1987, Alaska lost more than 20,000 jobs. Between 1985 and 1989, 44,000 more people left Alaska than arrived,” he said.
The economy started to recover in 1988 and has grown every year since then, representing the “the longest period of uninterrupted growth in the state’s history,” Fried wrote. However, the economy was forever changed in population and employment levels. Growth, though, comes at a slower pace than before.
“From 1959 to 1987, employment in Alaska grew by nearly 6 percent per year versus 2 percent during the most recent expansionary period,” he said.
Fried believes other industries rather than oil have been factors in economic growth in the past 20 years. In that period, oil production began declining, and the price of oil per barrel was below $15 in the 1990s, he said.
The state economist wrapped up his report by hinting at another major economic factor on the horizon, again coming from Prudhoe Bay — the proposed trans-Alaska gas pipeline.
Oil: A player for the future Goldsmith’s presentation, “How North Slope oil has transformed Alaska’s economy,” is relevant today. “People don’t understand the importance of oil to the economy,” he said. “We would be a very different place without oil. It would transform the whole economy — not just by fewer jobs.”
Goldsmith foresees strong potential for the oil and gas industry in Alaska, especially with development of huge heavy oil accumulations in the Prudhoe Bay area and the field’s vast natural gas reserves.
Adds Goldsmith: “Petroleum will continue to be the largest and most important private industry in the state for a long time to come.”
Read more in “Harnessing a Giant,” which will be available in October. Call Theresa Collins at 907-522-9469 for more information.
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