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Economist Goldsmith predicts steady decline in oil revenue, warns of 'fiscal cliff'

  • Author: Pat Forgey
  • Updated: July 8, 2016
  • Published January 31, 2014

JUNEAU -- A University of Alaska economist is making a prediction that the state Department of Revenue won't make: Alaska's oil revenue will keep diminishing for decades.

Scott Goldsmith, with the Institute for Economic and Social Research at the University of Alaska Anchorage, annually publishes a projection of future state revenues. Lately, he's been warning that Alaska is spending more than it will have.

"We're looking at falling off a fiscal cliff in about a decade," Goldsmith, a professor emeritus of economics, told legislators this year.

Goldsmith's report for 2014 predicts the future value of oil production from Alaska to be $119 billion dollars. That's down $49 billion from the $168 billion he predicted last year. His prediction last year was made before the passage of oil-tax cutting Senate Bill 21, though Goldsmith did not link the bill with the reduced financial projections.

Sustainable budgets?

Despite Goldsmith's conclusions, Gov. Sean Parnell's claim of sustainable budgets was defended by Sharon Leighow, his spokeswoman. "Our budgets are on a sustainable path," she said. "We have managed our reserves well," Leighow said, "reined in spending, and proposed a solution to address the largest cost driver -- the $12 billion pension deficit," she said.

She even said that Senate Bill 21 had increased oil taxes at lower prices, which would be good for the state.

Rep. David Guttenberg, D-Fairbanks, disputed that, saying that what Alaska really needs is to get more for its oil, and needs to get a larger share when prices shoot up. "The lack of upside on Senate Bill 21 is horrible," he said. "I think he's driving the state into poverty."

Leighow suggested Parnell had reduced spending.

"The trajectory of state spending was going the wrong way, and the governor has turned that around through tools such as setting spending targets and holding the line on agency budget growth," she said.

Future oil heavy, viscous

According to Goldsmith, if Alaska doesn't rein in spending further, the state will exhaust its reserves within a decade. New oil, even if it comes, will provide far less revenue than oil has in the past, he said.

Goldsmith said that Much of Alaska's remaining oil, such as shale, heavy and viscous oil, is "challenged," Goldsmith said, and won't provide the kind of profits that the state's vast reserves of conventional oil did.

"It may generate a lot of jobs, but it likely will not generate the kind of income on a per-barrel basis that we've been accustomed to," he said. Goldsmith's biggest change in his revenue projections came from reduced revenue from conventional oil. Goldsmith bases his annual estimates on state data but takes a long-term look that others don't. When the Legislature last year passed Parnell's Senate Bill 21, its cost predictions looked at the next six years. The Department of Revenue's closely-watched Revenue Sources Book looks at 10 years.

Earlier this year, Sen. Lyman Hoffman, D-Bethel, asked state Revenue Commissioner Angela Rodell for predictions beyond that, prompting committee chair Sen. Pete Kelly, R-Fairbanks, to intercede and cut off questioning.

Kelly called a closed-door meeting, and when the meeting resumed there was no talk of future production levels. Kelly declined comment about what was said in the meeting.

Goldsmith said he began his estimates with state data, but took them farther than the department did.

"I've pushed that projection out beyond the 10-year period," Goldsmith said. Charts accompanying Goldsmith's analysis show continued declines in oil production overall, though it also predicts some new oil sources that aren't in the Department of Revenue projections.

More gas revenues

His projection of deficits and decline include the newly produced oil. There's some good news for the state in the ISER projections. Goldsmith is predicting much more natural gas revenues in the state's future than he did last year, though not enough to avoid the fiscal cliff. And Goldsmith's dramatic prediction of tens of billions in reduced revenue is less than it sounds, he acknowledged, because inflation will make the numbers bigger.

"As any business person knows, revenues that you don't expect to get for 10 or 20 years are not worth as much as revenue in your pocket today," he said.

Adjusted for anticipated future inflation, Goldsmith calculated the net present value of the decrease at $19.7 billion in today's dollars. But not all the news was bad this last year. Booming stock market returns have helped boost the state's savings accounts, the Alaska Permanent Fund and others, by $5 billion to $65 billion, he said. In addition to the $48 billion Permanent Fund, those funds include the Constitutional Budget Reserve, Statutory Budget Reserve, and other accessible funds.

Goldsmith uses his projections to calculate what the state can afford to spend each year by adding existing saving to anticipated future revenues. Last year, he said, if the state budget was $5.5 billion it would be sustainable -- but the governor and legislators spent more than that.

This year, Goldsmith calculates the state can spend only $5 billion annually without chipping away at its oil revenues and its savings.

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