Alaska’s strategic industry

Prudhoe Bay Oil Rigs

At this point in Alaska’s history, the petroleum industry is central to the state’s economy, so creating an appropriate strategic economic plan surrounding that industry is important.

First, considering that the states oil industry will eventually “retire” in the sense that the oil production will be too low to sustain Alaska’s government expenditures, a sovereign wealth fund “retirement account” in the form of the Permanent Fund is in order. You could continue to give a portion of its earnings to every Alaskan. However, such a Permanent Fund dividend check is more like former Democratic Presidential candidate Andrew Yang’s idea of an income security stipend rather than a pure resource dividend. An income security program, though, needs to be called as such and appropriately sized according to needs. A true resource dividend would go up and down with resource prices and production amounts, like for example taking a percentage of the state’s direct oil tax revenue and dividing it up per person.

Next, making sure that Alaska’s petroleum industry is regulated properly, though not overly regulated, is important. Oil taxes should be fair to both sides based on independent analysis. What an independent tax plan should ask is not “do low taxes create more investment and jobs,” but, “what is the tax reduction amount per job gained in the industry, and the economic multiplier?” Everyone implies that they are economists when they ask for low taxes to create jobs, but they lack economic analysis in regard to the jobs per dollar of tax break given versus jobs per dollar of state spending.

If an independent oil company, no matter its legal tax structure, were to inflict an Exxon Valdez disaster on Alaska, than laws and agencies should be in place to be able to extract a settlement to alleviate the disaster. If Alaska lacks those institutions for lack of a budget, then that is not a good strategy.

Consider one agency, Department of Revenue (DOR). They employ about 900 people. Consider another similar agency, the Texas Railroad Commission (TRC), one of the agencies regulating the Texas oil industry. They also employ about 900 people. So DOR employs about 1 person per 800 Alaskans and TRC employs about 1 person per 30,000 Texans. So does that mean that Alaska is wasting resources on DOR while Texas is perfectly efficient? Or does it mean that Alaska has a very low population, high cost state that requires more effort per capita to monitor?

Anyone who compares Alaska’s budget to another state with different characteristics could be misinforming the public. Each budget item needs to be considered strategically compared to the importance of various industries, various sources of revenues and various social needs on its own merit. And in general, they will be more expensive per person in Alaska than elsewhere.

Each revenue source must be looked at strategically to gain a fair value, and each budget outlay — including very deceptive outlays that are surreptitiously labeled as a tax when they are in fact a natural gas subsidy and a subsidy for a specific region, e.g. Anchorage (such as the oil tax credits) — needs to be likewise analyzed. If revenue happens to be greater than spending, the preferable use of the excess should go into high value state infrastructure, such as a trans-Alaska road-side, small-bore, high pressure, dense phase pipeline, which would create economic development, or into the Permanent Fund until it is at about 300% of Alaska’s state GDP for sound future state macroeconomic policy. That way our sovereign wealth fund will always be able to take care of Alaska’s high cost needs for the future.

Doug Reynolds, a Ph. D. economist, has lived and worked in Fairbanks and has studied its oil and gas industry for more than 20 years. He can be contacted at ffdbr@Yahoo.com.

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