Tim Bradner: Alaska's oil decline leads us toward quagmire

EconomyNovember 17, 2012 

Alaska has its own version of a fiscal cliff and, it seems, our own version of political paralysis over doing anything about it. The cliff isn't as dramatic as the one facing Congress and President Barack Obama -- ours is more of a steep slope -- but it is actually more economically damaging to our state than the federal version is to the nation, I believe.

The problem is well-known: Our oil production, and revenues, are declining. Our spending is continuing upward. We have some comfortable revenue surpluses, for now, and we've built up some savings. This is good but it has masked the underlying problem.

It wouldn't take much of a wobble in oil prices to make a big dent in our revenues and if that happens we could chew through our cash reserves in a hurry, leaving only the Permanent Fund between us and ruinous new state taxes.

We'll get a fresh look at this when the state Department of Revenue produces its annual long-term revenue and oil production forecast in a couple of weeks -- the department does an update in the spring too. While these are just estimates, they are reasoned and independent judgments that usually hit the mark when viewed in hindsight.

One area where the department sometimes errs, however, is in estimating future oil production. It typically drops faster than the department, which works with the best available information, predicts. That's scary.

There doesn't seem to be any way out of a long-term decline in revenues. Gov. Sean Parnell hopes to increase oil production by reducing the state's high oil tax rates and giving the industry more incentive to invest, mainly in the big producing fields where we know there is a lot more oil.

Here's the quagmire part: The Legislature hasn't been able do this. I wish the new bunch better luck but it won't be easy.

There doesn't seem to be any way to really control spending growth, either. There are always a lot of brave words said by the politicians about this and we'll hear more Dec. 15 when the governor releases his proposed state budget for next year.

The difficulty with spending is that there are structural elements in the budget that drive growth and are really hard to control. Health care and rising medical costs felt all through the budget are the really big ones but high fuel costs are seen all through the budget too. Are you willing to send your kids to unheated schools?

Will a gas pipeline bail us out of this? Get real. That's years off and gas production won't bring in a lot of revenue anyway. Oil pays the bills.

How about drilling the Arctic National Wildlife Refuge? Forget it. Nice if it can ever happen but don't bank on it.

How about Shell, drilling offshore? Great prospects for oil and gas out there. This could help our pipeline keep operating but there's no money for our treasury. Those are federal offshore leases.

How about revenue-sharing for those federal royalties? The U.S. gulf states get revenue-sharing, so why not us?

Think this will ever happen with our nation facing huge deficits? Think Congress will help out Alaska, with us paying out annual Permanent Fund dividends to citizens?

No, we've got to muck through this ourselves.

Commonwealth North, the long-established group of Anchorage business leaders and professionals, once again has a task force of its members working on the fiscal dilemma. The group has been having weekly meetings for months, talking with people who have studied the problem and with candidates for office and legislators (those conversations weren't encouraging, I'm told).

Commonwealth North will produce a report and a series of recommendations to the new Legislature. I believe it will contain elements of a plan laid out by University of Alaska economist Scott Goldsmith that show how we can sustain our state budget, and our state's economy, if we can cap spending growth and put the surplus into more savings.

This is really common sense. It's like saving for retirement.

Can we do it? Back to the quagmire.

I hear more brave words from the new Senate Republican majority about creating a sustainable state budget. Good luck, but I'm from Missouri.

I've seen Republicans just as vociferous about spending money as Democrats, because the money is there (for now) and the demand for state projects and programs comes from constituents who vote. It's a brave politician, by whatever stripe, who says no when constituents can see the money's there.

I've watched multiple governors and Legislatures wrestle with this over the years. I've seen fiscal summits and fiscal plans. Nothing ever works.

I do believe we'll finally get a fiscal plan but it will be when all the money is gone.

Tim Bradner is a business and economics writer in Anchorage.

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