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Can Alaska’s oil wealth last long-term? Economist lays out ‘maximum sustainable yield’ plan to make the most of an estimated $160 billion in savings and future production Wesley Loy For Petroleum News
The gusher of annual oil revenue the state has enjoyed since production began at Prudhoe Bay in 1977 has transformed the Alaska economy and eliminated the need for personal income and general sales taxes that residents in other states must pay.
But from the beginning, this great wealth has burdened thoughtful Alaskans with a nagging question: How can we make the money last?
The oil and gas industry likewise frets, as it fears state overspending could lead to higher taxes on future production.
A University of Alaska Anchorage economist who for decades has studied the potential consequences of the state running out of oil money sees a way to avoid a crisis.
His plan, however, likely would require great discipline, some budget-cutting pain and plenty of political debate.
Sitting pretty? Scott Goldsmith, professor emeritus with UAA’s Institute of Social and Economic Research, lays out the plan in an 11-page research note titled “Maximum Sustainable Yield: Wealth Management for the ‘Owner State.’” The note, part of an ISER research initiative funded by a grant from Northrim Bank, is available online at http://bit.ly/Sq7fiy.
Goldsmith says the current estimate of the state’s petroleum wealth is $160 billion, which seems like a very large figure indeed.
“Alaska’s state government is sitting pretty today, with oil revenues at record levels, $60 billion in savings — including the Permanent Fund — and maybe another $100 billion worth of petroleum in the ground,” the research note says.
But the situation is deceptive, as oil production is dropping and state General Fund spending is climbing by 8 percent a year, Goldsmith writes.
“Soon, a combination of smaller oil revenues and higher spending will leave a gap in the budget that other potential revenue sources won’t be able to fill. And if the state lets the budget keep growing at the current pace and covers the shortfall with savings, the easily available savings will be gone by 2023 and the deficit could reach $7 billion a year.”
Revenue from North Slope natural gas often is cited as a replacement for oil revenue. But a pipeline to deliver the gas to market won’t be in operation until 2023 at best. And in any event, gas revenue won’t be sufficient to make up for falling oil revenue, Goldsmith writes.
The state also can’t count on oil and gas produced from the outer continental shelf to save the day, he says, noting that under current law the state would not share in federal revenue collected from OCS production.
Sustainable like the salmon Rather than rapidly deplete its savings, the state could plot a better course by “managing its remaining petroleum wealth for maximum sustainable yield — that is, set spending from petroleum wealth at a level that could be sustained indefinitely, benefitting both current and future Alaskans.”
He likens this approach to the way Alaska manages its salmon fisheries. To ensure a salmon harvest in future years, the state each season allows some salmon to escape upriver to spawn new generations. It’s an investment in the future, he says.
“Unlike the salmon that return every year, oil is a finite resource that will eventually disappear. But by converting the revenues it generates into financial accounts and other investments, we can make it a sustainable resource supporting prosperity and jobs in perpetuity,” Goldsmith writes. “In the salmon fishery, maximum sustainable yield is based on determining the escapement needed to produce the largest possible sustainable harvest. For our oil resource, maximum sustainable yield would be based on determining how much we need to save to produce the largest possible sustainable flow of earnings and other returns.”
But shifting to a maximum sustainable yield approach would be tough politically.
For one thing, the state’s petroleum wealth calculation “will always be a moving target, and at any time there will be reasonable differences of opinion about its current value,” Goldsmith says.
$6.4 billion per year The state already has made a start, Goldsmith says, by establishing the Alaska Permanent Fund, which currently holds about $42 billion. Other state accounts including the Constitutional Budget Reserve and the Statutory Budget Reserve hold another $18 billion, for total savings of $60 billion.
As for the estimated $100 billion worth of “petroleum in the ground,” Goldsmith attributes only $1 billion coming from the OCS, and none from the Arctic National Wildlife Refuge.
With the combined $160 billion in estimated petroleum wealth, the state could sustain spending of about $6.4 billion a year, Goldsmith says.
However, that would present an immediate challenge, as the state is expected to spend $7.6 billion from petroleum wealth in fiscal 2013, including the customary Permanent Fund dividend distribution to Alaska residents. That’s $1.2 billion over the maximum sustainable yield level of $6.4 billion.
Resolving this, Goldsmith writes, would “require some combination of spending cuts and new revenues amounting to $1.2 billion a year.”
So, how realistic is it to expect the state to adopt a maximum sustainable yield approach?
The “hard reality,” Goldsmith writes, is that state spending is too high and savings are insufficient to support “business as usual.”
Making the state’s petroleum fortune last long-term means deciding on a rule for allocating the wealth among Alaskans of today and the future. “But until now,” Goldsmith writes, “no rule has been agreed upon or even discussed.”
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