Alaskanomics

Don’t Confuse Alaska’s State Government Budget with the Alaska Economy

If you listen to the rhetoric in Juneau, the focus appears to be on the State government budget and legislators working to maximize the dollars that flow to Juneau.  That amount has been growing significantly over the past several years and has led to large spending increases that seemingly put government budgets on an unsustainable path.  Oil production continues to decline and the high production tax rates at the current high prices are leading companies to invest more elsewhere.

It’s important to not confuse the State government budget with the Alaska economy.  The State and Federal budget only account for under 10% each of our total gross state product, and the private sector accounts for about 81%.  We need to broaden our focus so that we are not looking through the prism of Juneau, rather what’s best for the overall economy.  This includes high-paying jobs in the private sector, opportunities for construction and service-based industries, and infrastructure development projects. 

Capital investments from the large natural resource companies are what drive our economy, and our largest industry is oil and gas.  Uncompetitive tax structures may bring in large State revenues in the short term, but dampen private sector investments in the long run and hurt the largest part of Alaska’s economy.  Government revenues are a result of a successful economy; not its purpose.  If the private sector is thriving, there will be plenty of options for the government to obtain the revenues it needs for operations.

We recently spoke at Northrim Bank’s annual economic luncheons in Fairbanks and Anchorage with an update on our economy and the opportunities before us.  We were joined by Bob Heinrich of ConocoPhillips who presented their challenges and opportunities in Alaska.  Click Here to view the presentation on Alaska’s economy.

State’s new oil production forecast model less rosy; too early to tell if it is more accurate

By Blythe Campbell
Director of Communications and Marketing
NANA Development Corporation

The Alaska Department of Revenue released their Spring Revenue Forecast last week, reducing their estimate of Alaska North Slope oil production for FY2013 and FY2014 by 14,500 and 11,800 barrels per day, respectively, over their fall forecast.

The Department of Revenue (DOR) began to refine its production forecasting methodology three years ago, and the new model has proved to more accurate. For the Fall 2012 forecast, DOR contracted with an independent engineering consultant to build a well-by-well evaluation of all currently producing wells. They also began to make “risk adjustments” to forecast the eventual production from projects underway to develop new oil – in the past the forecasts assumed all projects would produce their full potential value.

The chart above shows the DOR’s forecasts from FY2006 to FY2020, and actual production from FY2006 to FY2012. Since the Fall revenue forecasts are produced five months into the fiscal year, those same-year forecasts have been quite accurate. In most years, the second year’s forecast has also been fairly accurate. After that, the forecasts on the whole were considerably more optimistic than reality, because they counted on lower field decline rates and a significant percentage of new oil that did not materialize.

The FY2006 forecast was particularly optimistic, with an FY2012 prediction of 831,000 barrels per day. Actual production for FY2012 was 579,400 barrels per day. The difference of nearly 300,000 barrels per day was, for the most part, from inaccurate forecasts of new oil from projects the DOR expected to ramp up to peak production in FY2012.

Because 90% of the state’s unrestricted general fund revenue comes from petroleum, production forecasts are particularly important to state policy makers. The DOR’s new methodology tries to incorporate many of the factors that impact oil production in Alaska – decline rates, risks of delay, and performance risks.

However, DOR does not explicitly analyze, or report on, some of the additional factors that drive oil production in Alaska, including the level of oil prices and the state’s fiscal regime. High oil prices make more projects economic, especially considering the high cost of doing business in Alaska. However, the state’s high oil taxes, particularly the progressivity feature of ACES, erase much of the benefit of high prices on project economics. 

 

Join the Conversation on Alaska’s Economy at Northrim Bank’s annual Economic Luncheons April 3rd and 4th

Declining oil production continues to be an important concern for Alaska’s future, especially as we watch the dramatic increases in production in Texas and North Dakota.  Alaska has become an expensive place to conduct oil and gas business, as well as risky for new investments due to our current tax structure.  With legislation for reform currently on the floor in Juneau, there are opportunities and challenges to stabilize the tax structure and make Alaska competitive once again.  Alaskanomics invites you to join the conversation at Northrim Bank’s informative Economic Luncheons, in Fairbanks on April 3 and Anchorage on April 4.  Mark Edwards, Alaskanomics author and Northrim Bank economist, will provide an update on the Alaska economy, followed by a special presentation by Bob Heinrich, Vice President Finance with ConocoPhillips, discussing the challenges and opportunities facing the oil and gas industry in Alaska. 

Please RSVP using the links below if you would like to attend these free events, sponsored and hosted by Northrim Bank.  Seating is limited.

Fairbanks Economic Luncheon April 3

Anchorage Economic Luncheon April 4

U.S. Oil Production at Highest Level since 1992: Alaska’s contribution drops to less than 8%

By Blythe Campbell
Director of Communications and Marketing
NANA Development

The U.S. Energy Information Administration (EIA) reported U.S. crude oil production for the end of 2012 averaged 7 million barrels per day, the highest since December of 1992. The EIA attributed the milestone to increasing oil production in North Dakota and onshore Texas.

Texas now produces more than 30% of the nation’s crude oil, and North Dakota’s production is nearly 11% of U.S. totals. Alaska’s production is now under 8% of the U.S. total, down from a high of 26% in December of 1989. At that time, Alaska’s production was higher than Texas, at 1.9 million barrels per day and 26% of the U.S. total.

As the chart shows, both Texas and North Dakota have dramatically increased oil production over the last several years as Alaska’s continues to decline.

Anchorage Inflation Stable at 2%

According to the Federal Bureau of Labor Statistics, the Consumer Price Index (CPI) in Anchorage rose 2% in 2012.  Anchorage is the only "urban" community in Alaska that is tracked for these national statistics which come out twice a year.  It measures the price of a consistent “basket of goods” over time that comprises typical household spending.  Therefore, expenses for housing are weighted the highest as percentage of the average person’s income, followed by energy and food. 

The 2% increase over the last 12 months is slightly lower than Anchorage's 10 year average inflation rate of 2.7%.  Average prices have not shown much volatility during the decade.  The largest rate of change was 4.6% in 2008 when gasoline prices rose dramatically and the low was 1.2% in 2009, mainly due to flat housing prices. 

The largest price increase in the past 12 months in Anchorage was seen in medical care (+4.4%), apparel (+4.1%), housing (+3%), food (+1.1%), and transportation (+1.1%).  Price declines were measured in three major categories.  Energy decreased 2%, mainly due to a pullback in gasoline prices.  Education and communications was 1.1% lower and recreation fell 0.2%.

Nationwide, inflation has been low, increasing only 1.7% in 2012.  The largest increases have been in medical care (+3.7%), transportation (+2.6%), housing (+2.2%), food (+1.8%) and apparel (+1.8%). 

The most significant differences from Anchorage compared to the nationwide average are gasoline prices rose slightly in the U.S., up 0.5%, and housing costs in the U.S. have been increasing at slower rate than in Alaska.  These are the two largest expenses in the average person’s monthly budget, so they will have the largest impact.

Video: 2013 Alaska Construction Spending Forecast

Associated General Contractors Executive Director John MacKinnon and Economist Scott Goldsmith from UAA’s Institute of Social and Economic Research discuss expected Alaska construction spending in 2013 during the recent Associated General Contractors annual Alaska Construction Spending Forecast.

According to the forecast, construction spending in Alaska in 2013 is estimated to be about $8.4 billion, up 8 percent from spending in 2012. Increased spending in the oil and gas sector will account for most of this growth. Spending in this sector is expected to be up 13 percent, from $3.2 billion last year to $3.6 billion in 2013. Also adding to expected growth, a large state capital budget for fiscal year 2013 and $453 million in general obligation bonds that voters approved for transportation projects in the November 2012 election.

 

Click here to download the full construction spending forecast.
Research and printing underwritten by Northrim Bank.

Alaska foreclosure and delinquency rates remain low through 2012

Alaska continues to have some of the lowest levels of foreclosures and delinquent residential mortgage loans in the United States according to the Mortgage Bankers Association fourth quarter 2012 survey. Alaska ranked third best in the nation in both foreclosures and delinquencies of all loan types.

The total inventory of foreclosures in process is 1.1% in Alaska, while the country has a much larger lingering foreclosure inventory at 3.7% due to higher rates during the recession and longer resolution times. Alaska foreclosure rates remain unchanged year-over-year, while U.S. foreclosure rates have dropped from 4.4% one year ago.

Delinquent loans are more than 30 days past due, but not yet in foreclosure. Alaska is third best behind North Dakota and South Dakota in the overall level of delinquent loans. Alaska’s delinquency rate is 3.7%, while the U.S. average is 7.5% for all loan types. This is an improvement for Alaska from 4.3% one year ago. The U.S. delinquency rate has also come down from 8.2% last year.

Subprime lending to traditionally non-qualified borrowers was a large contributing factor to the national mortgage problems. The Mortgage Bankers Association survey covers 94,347 mortgages in Alaska. 6,670 or 7% were considered subprime, compared to 10% nationally. The rate of delinquencies and foreclosures on subprime loans is significantly higher. However, Alaska is in a far better position and again leads the nation as having the lowest level of foreclosures and delinquencies in this important category. Subprime foreclosures in Alaska are at 2.9% while the national average is 11.9%. Alaska’s subprime delinquency rate is 10% compared to the national average of 21.3%.

2013 Alaska Construction Spending Forecast Released; Spending Up 8%

The Associated General Contractors of Alaska released its annual construction spending forecast prepared by Scott Goldsmith and Mouhcine Guettabi of the University of Alaska’s Institute of Social and Economic Research. The report provides an informative review and estimate of construction activity in Alaska for 2013.

According to the forecast, construction spending in Alaska in 2013 is estimated to be about $8.4 billion, up 8 percent from spending in 2012. Increased spending in the oil and gas sector will account for most of this growth. Spending in this sector is expected to be up 13 percent, from $3.2 billion last year to $3.6 billion in 2013. Also adding to expected growth, a large state capital budget for fiscal year 2013 and $453 million in general obligation bonds that voters approved for transportation projects in the November 2012 election.

Click Here to download the full forecast.

Research and printing underwritten by Northrim Bank. 

Alaska’s personal income rises 2.5% over one year

Total personal income for Alaska was $34 billion in the third quarter of 2012, according to data released by the U.S. Department of Commerce Bureau of Economic Analysis. This is an increase of $846 million compared to one year ago, or a growth rate of 2.5%.  This marks the fourteenth consecutive quarter of income growth in Alaska since the first quarter of 2009.

The most recent annual numbers report per capita income of $45,529 in Alaska.  That ranks Alaska 7^th out of the 50 states and about 9% higher than the national average.

The largest contribution to income is wage earnings.  They increased 2.1% on average over the last 12 months, while employer contributions to pension and insurance benefits increased 2.5%.  Investment dividends, interest and rents grew by 4.2%.  Contributions from government social insurance programs climbed by 2.1%.  Proprietors’ income showed the largest percentage increase of 7% in the last year.

Of the largest business sectors, gross aggregate wages for utility works rose by 16%, followed by construction at 8%, and art, entertainment and recreation also at 8%.  Other notable income increases came in the accommodation and food service industry up 6%, military 4%, and retail trade plus 4%.

Overall government worker wage income grew by 1.6%, which was brought down mainly by a 4% decrease in federal wage earnings.  This was nearly equal to the 4.1% loss of federal government jobs in 2012.

Alaska’s population grew by 1.3% in 2012; largest growth was in Fairbanks and Mat-Su

The most recent Department of Labor estimate for Alaska's population is 732,298.  That is a 1.3% increase in 2012 resulting from an additional 9,162 people.  A majority of the growth is due to natural increase.  There were 11,034 births reported and 3,746 deaths for a natural increase of 7,288 people. The net of in and out migration was a change of 1,874 people.

The median age is 34, but that is one of the least common ages in the state.  The distribution is heavily weighted on the young and older end.  Of ages under 60, the fewest people are age 33 to 47.  Age 38 has the fewest people at 8,801.

The Municipality of Anchorage population is estimated to be 298,842.  This is an addition of 2,758 people over last year, or a 0.9% increase.  This is all due to natural growth, as there was a net out-migration of 376 people reported.  This is the second year in a row of a net decline in migration, and Anchorage is growing at a slower rate than the state as a whole.

The Interior region grew last year at nearly twice the statewide rate at 2.4% due to large gains in the Denali and Fairbanks North Star Borough.  The region is home to an estimated 115,114 people.  The gains were led by a net in-migration of 1,379, almost entirely into the North Star Borough.  Natural increase added another 1,310 people last year.

The Mat-Su Borough is also on an above average growth rate of 2.2%.  However, this is lower than the 4% growth rate seen in the Mat-Su over the last decade. Positive net migration of 1,196 drove the population increase, while natural increase added another 808 people last year.  The Mat-Su population is an estimated 93,801 people.

The slowest growth was in the Gulf Coast Region at 0.5%.  This includes the Kenai Peninsula, Kodiak, Valdez and Cordova.  The Southwest Region of the Aleutians, Bethel, Bristol Bay, and Dillingham grew at 0.7%.  The Southeastern panhandle grew at 1% while the Northern Region added 1.3% to its population.