Alaska must act before its oil money has run out

July 7, 2012 

While Alaskans try to sort out what our esteemed leaders and the nation's high court did to us on Obamacare, there is an urgent problem looming right here.

North Slope crude oil was fetching $102 a barrel last week and production was about 416,000 barrels daily. Alaska needs North Slope oil selling somewhere between $96 and $110 a barrel -- depending on whose numbers you use -- to avoid dipping its fiscal pinkies in red ink.

More than half of Alaska's economy and 90 percent of state spending depend on that revenue. The problem? Alaska's Clear and Equitable Share oil tax ratchets up the marginal tax rate to more than 90 percent at high oil prices, making investment for new oil by the North Slope's major players a fool's game.

ACES survives, despite its damage to Alaska's economy, because recalcitrants in the Senate bipartisan coalition blocked reform for their own purposes.

Consequently, North Slope investment and production are down, as is throughput in the trans-Alaska oil pipeline. North Dakota -- with its 11 percent oil tax and sizzling economy -- and other oil provinces with rational taxes have benefited from our stupidity. What that means for us, if nothing changes, is kaputski.

The state Office of Management and Budget put together graphs in its 10-year forecast that are, well, scary. They examine four possible spending and revenue scenarios and strategies. One or two beg reality and none is comforting, given what they do not say about our debts, Medicaid and the vagaries of politics, oil prices and public sentiment.

One uses $90-a-barrel oil, with 3 percent annual budget growth in all categories, including capital spending, to paint a picture.

The General Fund income line starts in fiscal 2012, at about $9 billion in revenues. It drops precipitously in fiscal 2013. It skids again next year, plateaus between 2015 and 2018 in the $5 billion range, then drops again, with revenue in 2022 plunging to about $4 billion. Alaska could be in deficit mode this year.

The other part of the equation, spending, is a "critical variable," the office concluded. It may be critical but it trends upward from nearly $6 billion in fiscal 2013 to more than $8 billion in 2022 -- even as revenues plunge.

In that scenario, sagging production, low prices and increased spending wipe out the Constitutional Budget Reserve Fund and the Statutory Budget Reserve Fund by 2021.

We could slash spending, increase production, diversify and wait for the Tooth Fairy but it is unlikely -- until the money is gone.

You cannot help but wonder about resistance to fixing the mess. Is it the "it's our oil" crowd or just dumb people?

There was this the other day in the Alaska Dispatch, from an editor who wrote an entertaining, self-congratulatory piece about why he is a great journalist:

"In my view, we're 'Alaska Inc.' We're the owner of hundreds of billions of dollars of petroleum and mineral resources. Companies pay us for rights to extract those resources. They make their money selling what they extract. In the case of oil companies, they make something to the tune of $5 billion a year in profit from selling Alaska crude. They're trying to make more. They're capitalists. They want the best deal for their shareholders. I, as a shareholder of Alaska Inc., want the best deal for our state. (Don't take it personally; it's just business, as the saying goes.)"

Without trying to, he was verbalizing the anti-oil crowd's take. Yes, he is right, we owned the North Slope resources in question -- but we sold them to the highest bidder. For that, we get a healthy royalty share. A lot of it is pumped into the Permanent Fund. That's Alaskans' cut -- along with jobs, increased commerce and a healthy economy. Taxes are for government, for spending, for buying votes. Yes, the industry makes money. So do we -- wads of it, without investing a dime. If we want the best deal for Alaska -- and pounding an industry hard enough to derail the economy is not it -- we should elect better people. (The editor seldom votes, he says, so he can remain pure. Seriously?)

With Alaska's future hanging in the balance, I again pose this to those who hate oil: If things do not change, when the money is gone, what's your plan?

I bet they do not have one.


Paul Jenkins is editor of the AnchorageDailyPlanet.com.

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