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Point-Counterpoint: Alaskans are better off keeping oil tax reforms

As the August ballot referendum to repeal Alaska's recent oil tax reforms (SB 21) inches closer, recent developments in world oil markets, as well as events here in Alaska, are rapidly making it a moot point and "no-brainer" to vote no.

Let's start with oil prices. What the critics of oil tax reform always seem to forget is that the new production tax regime actually favors the state and works against the oil companies when oil prices drop. And oil prices are in fact dropping. This is a game changer.

Spot market prices for Alaska oil began to soften last summer from their peak of $111 per barrel in July to $101 in November, a drop of $10 per barrel. They continue to hover around that level, for now, and are likely to trend downward from here.

The reasons are twofold: First, as the U.S. Federal Reserve slows its aggressive bond buying program (QE3), there will be gradually less cash sloshing around world financial markets with which to inflate oil prices and other liquid assets.

Second, crude oil supplies are surging in the Lower 48 due to shale "fracking" technology, so much so that the U.S. is on its way to becoming energy self-sufficient. That means even more downward pressure on crude prices over the next few years.

The Alaska Department of Revenue is recognizing these trends. Its fall 2013 revenue outlook revised expected prices downward from the previous spring's forecast by several dollars per barrel. The upcoming March edition is likely to project even lower prices.

As prices drop and production expenses rise, the simplified, flat 35 percent base tax rate under the new tax system is raising more revenue than the steeply progressive, highly complex monstrosity that was the old ACES system. Consider these figures:

For fiscal year 2014, with increasing expenses and decreasing production, the effective tax rate under SB 21 was 35 percent; under ACES it was 34.9 percent. For FY 2015, under a similar projected scenario of increasing production expenses and decreasing production, SB 21 holds steady at 35 percent, while the projected take from ACES would be 32.6 percent. (Source, Alaska Department of Revenue, October 2013). The state does better under SB 21.

As if turning the whole revenue question on its head isn't enough, an even larger game-changer is afoot: The new tax system is clearly stimulating forward progress on a natural gas pipeline project. As it turns out, a healthy oil industry is a prerequisite underpinning to an Alaska natural gas export project, so passage of oil tax reform last spring immediately improved our prospects.

It is no coincidence that just months after signing oil tax reform, Gov. Sean Parnell inked a "Heads of Agreement" with the major North Slope producers, setting out a framework for a gas export project. Shortly thereafter, he signed a Memorandum of Understanding with TransCanada, the pipeline company, that advances the project even further. Finally, the governor introduced a bill last month that will allow the state of Alaska to become a partner in the project.

Never in Alaska's history has so much tangible progress been made in such a short period of time toward our long-held dream of exporting liquefied natural gas. We are finally seeing meaningful agreements rather than wishful rhetoric. None of that would have happened without last year's oil tax reforms.

Oh, and I almost forgot to mention, investment in new oil production on Alaska's North Slope is surging. Oil tax reform is working exactly as its supporters said it would -- in fact, even more quickly and in even more ways.

In the face of all this, advocates of repealing Alaska's successful oil tax reforms continue to blow their horns gamely at daily "press availabilities." One wonders when they will realize that history has overtaken them and no one is listening anymore.

Scott Hawkins is president and CEO of Advanced Supply Chain International, an oil field services company headquartered in Alaska. He has also served as a bank economist and the founding president of the Anchorage Economic Development Corp. He is currently the chairman of ProsperityAlaska.org.



BY SCOTT HAWKINS