Declining North Slope Oil Production: Implications for the Alaska Economy Scott Goldsmith Institute of Social and Economic Research University of Alaska Anchorage December 9, 2008 LAW SEMINARS INTERNATIONAL Fourth Annual Conference on New Developments for Energy in Alaska Anchorage, Alaska

North Slope Oil Basic Statistics 15 Billion Barrels Production (enough to supply total world demand for 6 months) $378 Billion Value of production at the wellhead (purchasing power in 2007 $) $118 Billion State of Alaska cumulative revenues (purchasing power in 2007 $) $40 Billion Alaska Permanent Fund balance $3 Million Per Hour Oil and the Alaska Economy

Alaska Natural Resources: 2005 Market Value (Million $) Oil $18,164 Gas $ 761 Mining $ 1,506 Seafood $ 1,392 Timber $ 142 Tourism $ 1,592 Value determined at point of production except for mining.

Indicators of Oil’s Share of Economy NR Production value since 1867 90% State General Fund revenues 85% Market value of resource production 82% Industrial property tax base 80% Private investment spending (Direct) 60% Gross state product (Direct) 33% Personal income (Total) Jobs (Total) Jobs in Oil Sector 3% Oil and the Alaska Economy

Oil and the Alaska Economy Gedankenexperiment Oil and the Alaska Economy

ANOTHER DRY HOLE AT PRUDHOE BAY Companies Say “We Give Up” April 1, 1968 ANOTHER DRY HOLE AT PRUDHOE BAY Companies Say “We Give Up” Oil and the Alaska Economy

Alaska: The Road Not Taken No Production Resource Industry Squeeze Support Sector Squeeze Federal Dollar Squeeze Retiree Out Migration A WORK IN PROGRESS Oil and the Alaska Economy

Alaska: The Road Not Taken I. No Production Oil and the Alaska Economy

No Production: Oil Patch Pathway

No Production: Oil Patch Pathway

No Production: Oil Patch Pathway

No Production: Government Pathway STATE GOVERNMENT EMPLOYEES 16 Thousand $$$ PETROLEUM REVENUE SPENDING PRIVATE SECTOR JOBS 18 Thousand LOCAL GOVERNMENT EMPLOYEES 15 Thousand TOTAL JOBS = 49 THOUSAND. Assumption: All Spent Petroleum Revenues Pay for Operations.

No Production: PFD Pathway 2008 DIVIDEND BASICS $3,269 Dividend 611 Thousand Recipients $2 Billion Distribution COMPARE 2007 EARNINGS (Billion $) $1.4 Retail Trade $1.6 Federal Civilian $1.7 Construction $1.8 Oil + Mining $2.0 Health $2.2 Military

Alaska: The Road Not Taken I. No Production ACTUAL OIL DISAPPEARS AND TAKES AWAY WHAT’S LEFT INCOME (Bill $) $24.3 $7 $17.3 JOBS (000) 361 107 254 PEOPLE (000) 660 183 477 Oil and the Alaska Economy

Alaska Economic Drivers: The Foundation of the Economy Shares of Personal Income in 2005

Alaska with Oil: Bigger, Richer, Healthier Job Opportunities Business Opportunities High Incomes Low Taxes Low Prices New People Public services Public Infrastructure Business infrastructure Consumer goods and services Oil and the Alaska Economy

Alaska: The Road Not Taken II. Resource Industry Squeeze Oil and the Alaska Economy

Resource Industry Squeeze: Job Growth (Thousands) STATEHOOD 1961 2006 Change TOTAL 10 45 35 Tourism 1 22 21 Fishing 7 17 Air Cargo - 3 Mining 2 Timber Oil and the Alaska Economy

Resource Industry Squeeze: Actual and Projected Tax Burden 2004 State General Fund Revenues (Million $) from Seafood, Tourism, Mining Actual $112 If Oil $ Disappeared $502 Incremental Burden without Oil $ $390 Increase in Tax Rate 4+ Times Oil and the Alaska Economy

Oil and the Alaska Economy Resource Industry Squeeze: State Government Economic Development Assistance Tourism Docks Fishing Loans Air Cargo Jet Fuel Mining Roads Timber Oil and the Alaska Economy

Resource Industry Squeeze: Other Benefits of Oil Low Wages Support Business Services Oil and the Alaska Economy

Resource Industry Squeeze: No Oil Job Growth (Thousands) Actual 2006 No Oil % Reduction No Oil 2006 TOTAL 45 29 Tourism 22 30% 15 Fishing 17 12 Air Cargo 3 50% 1 Mining 2 Timber Oil and the Alaska Economy

Alaska: The Road Not Taken: II. Resource Industry Squeeze BEFORE TAXATION AND CONTRACTION TAKES AWAY WHAT’S LEFT INCOME (Bill $) $17.3 $.9 $16.4 JOBS (000) 254 20 233 PEOPLE (000) 477 35 442 Oil and the Alaska Economy

Alaska: The Road Not Taken: III. Support Sector Squeeze Oil and the Alaska Economy

Support Sector Squeeze: Household Tax Burden Reduces Purchasing Power 34%* $13,150 Per Capita in 2006 * Average State Income Tax Rate to Replace Oil Revenues—1970 to 2006. Oil and the Alaska Economy

Oil and the Alaska Economy Support Sector Squeeze: Smaller Market Size Purchasing Power (Billion $) Oil and the Alaska Economy

Support Sector Squeeze: Petroleum Reduces Seasonality Index of Seasonality 1968 32% 2006 12% Percent job increase July over January. Ratio of July to January Tourist Visitors is 10:1. Oil and the Alaska Economy

Support Sector Squeeze: Cost of Living Oil and the Alaska Economy

Alaska: The Road Not Taken: III. Support Sector Squeeze BEFORE HOUSEHOLD TAXATION AND UNSTABLE MARKETS TAKE AWAY WHAT’S LEFT INCOME (Bill $) $16.4 $1.5 $14.9 JOBS (000) 233 20 214 PEOPLE (000) 442 33 409 Oil and the Alaska Economy

Alaska: The Road Not Taken: IV. Federal Dollar Squeeze Oil and the Alaska Economy

Federal Dollar Squeeze: The Largest Federal Grants in 2007 (Million $) MEDICAL ASSISTANCE PROGRAM $ 697 HIGHWAY PLANNING AND CONSTRUCTION $ 629 AIRPORT IMPROVEMENT PROGRAM $ 225 INDIAN HEALTH SERVICES HEALTH MANAGEMENT DEVELOPMENT PROGRAM $ 135 INDIAN HOUSING BLOCK GRANTS $ 106 UNEMPLOYMENT COMPENSATION BENEFIT PAYMENTS $ 98 IMPACT AID $ 95 FOOD STAMPS $ 86 TRIBAL SELF-GOVERNANCE $ 68 PAYMENTS FOR EXCESS EARNED INCOME TAX CREDITS $ 61 Oil and the Alaska Economy

INSERT Non Earned Income (Excluding Retirement Income) With Oil $439 million Without Oil $220 Million Oil and the Alaska Economy

Alaska: The Road Not Taken: IV. Federal Dollar Squeeze BEFORE SMALLER POPULATION TAKES AWAY WHAT’S LEFT INCOME (Bill $) $14.9 $1.7 $13.2 JOBS (000) 214 19 195 PEOPLE (000) 409 32 377 Oil and the Alaska Economy

Alaska: The Road Not Taken: V. Retiree Out Migration Oil and the Alaska Economy

Oil and the Alaska Economy Retiree Out Migration Retirees represent $1.5 billion in spending. Tax Free PFD Public Amenities Oil and the Alaska Economy

Alaska.: The Road Not Taken V. Retiree Out Migration BEFORE ABSENCE OF RETIREE BENEFITS TAKES AWAY WHAT’S LEFT INCOME (Bill $) $13.2 $1 $12.2 JOBS (000) 195 6 189 PEOPLE (000) 377 11 366 Oil and the Alaska Economy

Alaska: The Road Not Taken The Bottom Line WITH WITHOUT OIL % DIFFERENCE INCOME (Bill $) $24.3 $12.2 50% JOBS (000) 361 189 (90) 48% PEOPLE (000) 660 366 (230) 44% Oil and the Alaska Economy

Alaska: The Road Not Taken The 2/3 Rule About 2/3 of the economic growth in Alaska since Statehood can be traced to Petroleum. Oil and the Alaska Economy

Alaska: The Road Not Taken Economic Driver Job Growth (000) STATEHOOD 1961 2006 INCREASE TOTAL 59 74 16 Tourism 1 15 14 Fishing 7 12 5 Mining 2 Air Cargo - Timber Military 33 26 -7 Federal Civilian 17 Oil and the Alaska Economy

Alaska: The Road Not Taken Non Oil Economic Driver Shares STATEHOOD 1961 2006 TOTAL 100% Tourism 2% 20% Fishing 12% 16% Mining 3% Air Cargo Timber Military 56% 35% Federal Civilian 27% 23% Oil and the Alaska Economy

Candidates for Comparison ? Oklahoma New Mexico South Dakota Wyoming Montana Idaho Florida Nevada Hawaii Oil and the Alaska Economy

Oil and the Alaska Economy

Maine Is Not Like Alaska Physically attached to Lower 48 Federal land ownership 1% Native American population 1% Lobsters instead of crabs Unusual accent Presidential hangout Oil and the Alaska Economy

Oil and the Alaska Economy Maine and Alaska Many moose Few humans Cold Remote Independent streak Oil and the Alaska Economy

Oil and the Alaska Economy Maine and Alaska Fish / Tourism / Timber / Mining / Agriculture Limits on sustainable harvests Challenged by globalization Small and declining manufacturing Dependence on federal $$$s Conflicting visions about use of resources “Zero Sum Game” development mentality Strategic development planning advice from Brookings Institution Oil and the Alaska Economy

Maine Economic History in a Nutshell Throughout the second half of the twentieth century, Maine has struggled to find a proper balance between resource-based industrial development and environmental protection. The state has come to rely heavily on tourism, small manufacturing enterprises and defense-related activities and installations for much of its economic base. Oil and the Alaska Economy

Maine Economic Performance: Some Evidence Gross State Product per capita: 43rd (Ak 7th) Job Growth: 66% (Ak 144%) Population Growth: 46th (Ak 5th) Median Age: 1st (Ak 49th) Housing Built Before 1939: 31% (Ak 2%) Median Paycheck: 77% as high as Alaska Projected Population Growth = 1/3 US average (Ak 30% above) Oil and the Alaska Economy

Oil and the Alaska Economy Alaska vs. Maine Family Oil and the Alaska Economy

Comparing the Average Family of 4 MAINE* ALASKA Wages $55,641 $72,750 State Taxes -$7,077 $0 Dividend $6,800 Public Spending $29,995 $49,064 TOTAL $78,560 $128,614 Difference +$50,054 * Adjusted for lower cost of living in Maine. Oil and the Alaska Economy

Oil and the Alaska Economy Actual Performance Since 1990: Jobs vs. Oil Production (Index: 1990 = 1) Oil and the Alaska Economy

Confounding The Paradox ? 104 thousand jobs added 99 thousand are “Support” 5 thousand “Basic” New Basic jobs are lower wage (tourism) replacing higher wage jobs in Timber and Federal Government Oil and the Alaska Economy

Explaining The Paradox Federal $$ Military Expansion Petroleum Revenues Retirees Air Cargo National Economic Boom Increased Labor Intensity of Petroleum Production Anticipation of Gas Line, OCS, etc. Support Sector Catching Up Wealth Accumulation Oil and the Alaska Economy

Oil and the Alaska Economy Federal $ Juggernaut Oil and the Alaska Economy

Wealth Creation: Business and Public Oil and the Alaska Economy

Wealth Creation : Households “Son of the Permanent Fund” Fund $35 Billion Oil and the Alaska Economy

Oil and the Alaska Economy The Economic Future of Alaska: 50 Years of Statehood Has Not Changed the Challenges Oil and the Alaska Economy

Alaska Natural Resources: 2005 Market Value (Million $) Oil $18,164 Gas $ 761 Mining $ 1,506 Seafood $ 1,392 Timber $ 142 Tourism $ 1,592 Value determined at point of production except for mining.

Oil and the Alaska Economy Petroleum Resources for a Sustainable Economic Future (Billion Barrels of Oil) Production History: North Slope 15.4 Cook Inlet 1.3 Reserves Today: Central North Slope 5.9 Cook Inlet .1 Potential Additional Reserves (Technically Recoverable—USGS, MMS): ANWR 10.4 NPRA 10.6 OCS 23 Central North Slope 4 Oil and the Alaska Economy

Oil and the Alaska Economy

Resource Curse: Some Symptoms Corruption Rent Seeking Entrepreneurial Decline Overheating Economy Economic Distortions Public Sector Overexpansion Mismanagement Underinvestment Oil and the Alaska Economy

Declining North Slope Oil Production: Implications for the Alaska Economy Scott Goldsmith Institute of Social and Economic Research University of Alaska Anchorage December 9, 2008 LAW SEMINARS INTERNATIONAL Fourth Annual Conference on New Developments for Energy in Alaska Anchorage, Alaska