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Economist to state: cut spending, save Goldsmith projects that future oil and gas revenue can’t sustain Alaska’s current spending rate, inviting ‘severe fiscal crunch’ Wesley Loy For Petroleum News
Save more, spend less. That’s long been economist Scott Goldsmith’s advice for Alaska’s oil-dependent state government, and he’s offering it again in advance of the upcoming legislative session.
Whether to reduce oil taxes to spur industry investment is expected to be a big issue for lawmakers.
But that debate is not Goldsmith’s focus. Rather, he warns the state is spending too much, and future oil and gas production can’t sustain it.
“Reasonable assumptions about potential new revenue sources suggest we do not have enough cash in reserves to avoid a severe fiscal crunch soon after 2023, and with that fiscal crisis will come an economic crash,” Goldsmith writes in a new analysis. “The answer is to save more and restrict the rate of spending growth.”
The analysis was posted Jan. 3 on the website of the University of Alaska Anchorage Institute of Social and Economic Research. Goldsmith is a professor emeritus with ISER.
Find the analysis at http://bit.ly/110xbp2.
The ‘fiscal gap’ For decades, Goldsmith has talked of the “fiscal gap,” the different between revenue and spending.
For now, and for several years out, the state has ample money thanks to high oil prices and massive savings accounts including the Constitutional Budget Reserve, the Statutory Budget Reserve and the Alaska Permanent Fund. The current value of these financial assets is currently around $60 billion.
Longer term, Alaska faces trouble, says Goldsmith.
“If Alaska had $117 billion in cash reserves and the Permanent Fund by 2023, the state would be on the path to sustainable spending far into the future,” he writes. “But ... that’s twice what the state has in financial assets today. So the state needs to sharply step up its savings rate, starting now.”
The state can still expect a very lucrative stream of oil and gas revenue. But it won’t be adequate to sustain the state’s current spending habit, Goldsmith says.
Oil and gas projections Goldsmith’s 14-page analysis includes concise projections of oil and gas production expected in Alaska over the coming 50 years.
The “net present value” of state petroleum revenues over that time horizon is $88.7 billion, Goldsmith projects.
“We determine this value by estimating future taxes and royalties for 50 years, assuming the current fiscal structure and energy prices as well as reasonable estimates of economically recoverable reserves, both known and unknown,” the analysis says.
Most of the value, $67.1 billion, will come from 3.5 billion barrels of oil produced from known fields, the analysis says.
Another $9.9 billion is projected to come from “unconventional and new oil.” This breaks down as follows: $4.8 billion in conventional oil from new fields on the central North Slope; $1.7 billion from shale oil; $1.7 billion from viscous and heavy oil; and $1.7 billion from the outer continental shelf.
The analysis shows zero revenue from the Arctic National Wildlife Refuge and the National Petroleum Reserve-Alaska.
The state long has pursued a multibillion-dollar natural gas pipeline to develop the vast stranded gas reserves on the North Slope, chiefly in the Prudhoe Bay and Point Thomson fields.
Goldsmith’s analysis marks down $11.7 billion in net present value from natural gas produced over the 50-year period. The gas is “assumed to be monetized through a pipeline to tidewater,” exporting 3.5 billion cubic feet per day starting in 2023.
Natural gas, Goldsmith says, is obviously not an answer for sustaining growth in state spending.
He further notes that new broad-based income and sales taxes would only postpone, not eliminate, the fiscal crunch.
Goldsmith advocates a “maximum sustainable yield” approach, where the state builds a petroleum nest egg, invests the savings and follows a disciplined spending regime.
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