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Not all doom and gloom for Alaska Goldsmith offers his thoughts on situation where low oil prices create a fiscal headache & presage a downturn in the state’s economy ALAN BAILEY Petroleum News
While the continuing low price of oil is creating a major challenge for Alaska’s fiscal situation and will lead to a downturn in the state’s economy, the state does have strengths that can help it weather the storm, Scott Goldsmith, professor emeritus, economics, with the University of Alaska Anchorage’s Institute of Social and Economic Research, has told Petroleum News. And, while some people worry about a repeat of the economic calamity that hit the state during a period of low oil prices in the mid-1980s, the state now has a more resilient and diverse economy than at that time, Goldsmith said.
Goldsmith said that Department of Labor employment statistics show that employment levels in the state had actually been rising up to the first quarter of 2015, with employment at that time at the highest level ever.
“Most of the higher level is attributable to petroleum and construction,” he said.
Into decline However, estimates through to December, also published by the Department of Labor, show an employment slowdown, a predictable trend given the current economic situation. Those two factors, petroleum and construction, that primarily drove the buildup in employment are now set to go into a decline, thus suggesting that an economic slowdown is at this point somewhat inevitable.
From the perspective of the oil patch, Shell, a company that has been spending major amounts of money in the state, is now pulling out of its Alaska program. And development work on ExxonMobil’s massive Point Thomson field on the North Slope is starting to wind down, as the field moves towards production startup, Goldsmith said. ConocoPhillips has made headway on some of its projects but has announced a cutback in its employment levels.
Much of the recent boom in construction has been driven by expenditure from the state’s capital budget, a budget that is now being drastically cut in the face of dwindling oil revenues. Having been at a level of $2 billion at one point, the capital budget now stands at about $100 million, a figure that represents the state’s funding match for federal funding, Goldsmith said. Although there will likely be some pushback on that ultra-low spending level, any increase in the capital budget will be a tough sell, given the knock-on impact on the operating budget and the need for money for the state’s involvement in the project aimed developing a North Slope gas export pipeline, he said.
A report on how much money remains in the current capital budget is due out in the next month or so and will likely show that less money is now available, Goldsmith said.
Low oil prices continuing Moreover, with the Department of Revenue’s forecast oil price, the basis of state revenue predictions, standing at $66, in comparison with a current actual oil price of $51, some further unpleasant monetary surprises seem to lurk on the horizon. And there is no reason to believe that oil prices will rise in the near future.
Somehow, the state is going to have to balance its budget, Goldsmith commented.
“It’s going to be through a combination of budget cuts and new taxes, and either one pulls purchasing power out of the economy,” he said.
Another concern is the potential loss of 2,600 people at the Joint Base Elmendorf Richardson as a consequence of a nationwide reduction in the number of army personnel.
More resilient economy Despite the seeming inevitability of an economic downturn in Alaska, Goldsmith cautioned against making comparisons with the mid-1980s, when many people lost their jobs, many left the state and the housing market collapsed amid a sharp drop in the price of oil. In that earlier Alaska era the state was undergoing an oil-fueled boom, with a relatively high economic growth rate having a multiplier affect in accelerating the need for new housing and new commercial construction. In the subsequent downturn, as the oil price dropped, that multiplier effect reversed, causing a precipitous drop in economic activity, Goldsmith explained.
But Alaska is not currently experiencing a boom of the type seen in the ’80s, so that there should not be the same type of accelerated downturn that the state experienced at that time.
“It’s a more stable economy,” Goldsmith said.
Moreover, the economy has diversified, he said.
“There are more independent sources of employment and income, independent of oil and gas, and independent of state government expenditures than we had 25 years ago,” Goldsmith said. So the state has a number of strengths going forward.
For example, the state’s retiree population has increased significantly in recent years, growing at the fastest rate of any state in the nation. And these retirees represent a major source of purchasing power, with income from state and private pensions, Social Security and Medicare. Total money flowing into the state via retirees amounts to at least $2 billion annually, a figure broadly equivalent to income from the state’s tourist industry, Goldsmith said.
And the state tourism and mining industries have grown in recent decades. In particular, the state now boasts around half-a-dozen world class mines, Goldsmith said. These industries only represent a small piece of the overall economic pie but, unless there is a complete collapse in the petroleum sector, there are economic expansion possibilities, following the pending downturn.
Permanent Fund Goldsmith also cited the Permanent Fund dividend as a significant factor supporting today’s Alaska economy.
“Each year the Permanent Fund dividend can pump over $1 billion into the economy,” he said. “This year it will be $1.4 billion.”
Goldsmith also argued for support for the state’s flagging revenues from the use of Permanent Fund earnings not earmarked for dividend payments. The use of these earnings would not have a negative impact on the economy and the time has come to transition into the use of the Permanent Fund as a sustainable source of state revenue, he said. The state’s Constitutional Budget Reserve fund can also provide some flexibility in dealing with the state’s fiscal situation but at the risk of using money from this fund to defer difficult spending decisions. Another issue is the question of investment credits being paid to the oil industry, a difficult issue to analyze but an area where there is probably at least some scope for state cost reductions without a significant negative impact on the industry, Goldsmith said.
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