Alaskanomics

Video Clip: Norway's Oil Minister discusses oil taxes, revenue and cost sharing for oil production

Norwegian Minister of Petroleum and Energy, Ola Borten Moe, talks about elements of oil production fiscal terms. Norway has a 78% marginal tax on income taxes, and a government share of every license. The government also shares in the costs of research and development according to their share in the license. In Norway's system, oil companies can deduct all expenses over a short period of time. 

Moe was speaking at a Northrim Bank Oil and Gas Speaker Series event in November 2011 in Anchorage presented by the Alaska World Affairs Council.

Click here to see the upcoming schedule in the Northrim Bank Oil and Gas Speaker Series.

 

Forbes: Alaska's energy tax structure is among "Worst in the World"

At the Anchorage Economic Development Corporation annual economic forecast luncheon, keynote speaker Steve Forbes characterized Alaska's energy tax structure as one of the worst in the world - second only to North Korea. Forbes believes that oil prices will not stay above $100 per barrel forever, and suggested that a "sensible" tax structure will attract more capital and result in more long term revenues to Alaska.

Forbes, chairman and editor-in-chief of Forbes Media, also believes the U.S. could be a major energy exporter, saying "The abundance (of energy resources) has barely been scratched." With a changes in Congress that Forbes predicts will take place in the fall elections, he said it was possible that ANWR could be opened to oil exploration and development.

Alaska's "Post-Prudhoe Economy": Will we Make the Right Choices?

The University of Alaska's Institute of Social and Economic Research (ISER) released a new publication as a part of the the organization's 50th anniversary celebration. Author Scott Goldsmith points out that, over the last 10 years, a combination of high oil prices and revisions in Alaska's oil production taxes have caused state government revenues to "skyrocket" despite a 40% drop in oil production over the same time period. Goldsmith lays out a strong case for Alaskans to proactively manage our assets to ensure that Alaska has a good economic future not only for the current generation of Alaskans, but for generations to come. That will require long term thinking on the part of all Alaskans, but particularly by our elected officials. Read the publication here.

Alaska is the Most Productive State in 2010

Alaska led the nation in 2010 with the highest per capita real gross domestic product (GDP).  At $63,424 per person in value added economic output Alaska was 49% above the national average.  Mississippi rated the lowest at $29,345 or 31% below the national average.

Though Alaska’s output was impressive on a per capita basis, the size of our total GDP was $49 billion, which accounted for only 0.3% of the entire $14.6 trillion U.S. economy.

The Federal Bureau of Economic Analysis considers this report the most comprehensive measure of U.S. economic activity.  It calculates the total of what consumers, businesses and the government spends on final goods and services, plus investment and net foreign trade.  For example, it counts the wages earned by workers, the income generated by businesses and the sales, property and excise taxes paid.

Alaska’s real GDP grew by 1.9% in 2010 following and impressive 8.9% gain in 2009 in the midst of a national recession.  By comparision, the U.S. GDP increased 2.6% in 2010 after declining 2.5% in 2009.  In 2009 Alaska was the third fastest growing state economically and one of only 10 to increase. 

In 2010 the recovery was widespread, with 48 out of the 50 states showing improvement.  North Dakota was the fastest growing with a 7.1% gain due to a very active energy sector.  Second was New York, improving 5.1% mainly from a rebound in finance and insurance, which also helped Connecticut.  Nationally, durable goods manufacturing was the source of the largest overall improvements for the U.S. economy.  Retail trade also was a positve driver in 2010.  However, construction activity declined for the sixth straight year and affected Nevada the most.

In Alaska, the 1.9% growth in GDP was led by government spending, followed closely in improtance by mining (which includes oil & gas).  The third largest positive driver was health care, follwed by real estate.  Unlike the rest of the nation, construction activity was positive in Alaska.  The only significant decline in Alaska was the transportation and warehousing sector.

It is important to note that these national figures do include government spending.  Federal deficit spending has been over a $1 trillion dollars a year, meaning much of this “stimulus” spending is not sustainable over the long run and will need to decrease in future years.  Private sector economic growth will have to make up for this short-term government excess spending if GDP figures are going to continue to rise in the future.

The complete report can be read at: http://www.bea.gov/newsreleases/regional/gdp_state/2011/pdf/gsp0611.pdf

Oil Production: What we can agree on

I believe that declining production is the biggest long-term risk to our economy and to state government revenues. Just slowing the rate of decline will require significant new investment by the oil industry.

Northrim took an active role in advocating for changes in the State’s tax policies in the last year, including helping to found the Make Alaska Competitive Coalition to educate more Alaskans about the critical need to increase oil production. The results of the most recent legislative session were mixed, with the Governor stepping up to propose changes to ACES and the House of Representatives passing a version of the Governor’s bill. The Senate, on the other hand, continued the divisive politics of the past, pitting Alaskans against our most important industry.

While other states must grapple with economic forces outside of their control, Alaska’s policymakers have the ability – and the responsibility – to take a long term view of Alaska’s revenues and expenses. We need to create better alignment between the State of Alaska and the oil industry.

We hope that over the next few months our leaders can return to a productive dialogue about this issue – starting with the points I believe we can all agree on:

• We need to increase oil production to support our private sector economy and state government. There is a real risk that in just a few years, production may decline to a point where the pipeline is not technically viable, and we will have no way to get our resources to market. We are closer to that point than we want to be.
• We can get increased oil production through new exploration, more development in older fields, and new technology to produce heavy oil, but all of these will require significant additional investment because the easy oil is gone and operating costs have increased significantly.
• The three major items under the State’s control that impact investment decisions are taxes, regulation, and access to resources. We need to make meaningful changes to all of these things.

If we can start from these points of agreement, we can move forward to the more difficult discussions, and decisions, that must be made soon to increase oil production. The Governor’s “million barrels per day” goal is a good one – let’s all work together as Alaskans to achieve it. 

ISER: Four Scenarios for Alaska's Future

Alaska's Institute of Social and Economic Research (ISER) has just released "Four Scenarios for Alaska's Future," a paper based on ISER's Investing for Alaska's Future research initiative. Author Scott Goldsmith describes four potential directions for Alaska's economy, given declining oil production, lower prospects for a natural gas pipeline, and challenges for petroleum development on federal lands and in federal waters.

We are the Chosen Ones or No Room at the Fishing Hole

This scenario relies on continuing good luck - high oil prices, the opening of ANWR to development, better royalty terms with the federal government, lower petroleum taxes leading to higher petroleum industry investment, and a gas pipeline to the Lower 48. These factors result in an "affluent Alaska economy" with some negative consequences, like traffic congestion and combat fishing.

The Big Crash or I Can Handle the Hangover because the Party was Awesome

In this "boom and bust" scenario, the good times continue for awhile, but the price of oil plummets and state government, which is 90% dependent on petroleum revenues - runs out of cash. State budgets are slashed, the Permanent Fund is tapped, personal income taxes return, and taxes on business increase. People flee the state for better economic opportunities elsewhere.

The Slow Squeeze or Up a Lazy River

This scenario envisions flat commodity prices as world supplies increase, reducing the calls for increased domestic production that might spur more development on federal lands. This scenario also assumes that Alaska is unable to craft a tax policy that stimulates investment, and instead Alaska's leaders adopt a "get it while you can" policy to maximize short-term revenue. The short-term surpluses are invested in dubious "economic development" projects that, like the projects before them, fail to live up to expectations. The economy shrinks and young people leave the state. Those who are left return to the pioneer Alaska lifestyle, living out their days enjoying the scenery.

Strategic Planning or Socialist Takeover

The fourth scenario envisions Alaskans actively managing the state's nonrenewable petroleum resources for the maximum benefit of Alaskans. Rather than let world oil markets, the federal government, or other outside interests determine Alaska's fate, the state's leaders look to the future and 1) maximize long-term revenues from petroleum production, 2) control growth in state spending, and 3) diversify revenue sources. Following this scenario would result in less petroleum revenue and state spending today in exchange for a more stable future with benefits for future generations of Alaskans.

While ISER points out that these scenarios are not predictions, the paper describes each scenario in detail, supported by examples from Alaska's history. Read the full paper here.

Commonwealth North Issues Oil Tax Study; Calls for Changes to ACES

Commonwealth North released their oil tax study report, "Alaska's Oil Investment Tax Structure: Establishing a Competitive Alaska." The Board of Directors and members of Commonwealth North engaged in a four month study to evaluate the primary public policy concerns associated with Alaska's oil tax structure. The study group was headed by Northrim Bank President Joe Beedle and Municipality of Anchorage Office of Management and Budget Director Cheryl Frasca. Study group members heard from oil tax payers, legislators, economists, and informed Alaskans. The data was analyzed, compared, discussed, and the final report produced. The study group determined that the current oil production tax, ACES, adversely affects investment in oil production on the North Slope.

The Commonwealth North Board of Directors approved a resolution supported by the findings of the oil tax study report, urging the legislature to reduce the ACES progressivity rate. Many of the presentations from individuals who met with the study group are available on the study group page.

Oil Pumps Alaska's Economy to Twice the Size - But What's Ahead?

In a new paper published by the University of Alaska's Institute of Social and Economic Research, economist Scott Goldsmith explains the importance of oil money to Alaska's economy. In earlier research, ISER estimated that one-third of Alaska jobs are oil related, but close to 20% more jobs can be traced to the "spinoff" benefits of oil weath, including:

• A stable economy that's twice the size it would be without oil revenue
• Economies of scale from a population that's double what it would be
• No state income tax for individuals, and much lower taxes for non-oil businesses
• The nation's highest per capita state government spending

ISER's analysis shows that the State of Alaska has collected $157 billion (in today's dollars) from oil since 1959. Where has it gone?

• $70 billion went to new and expanded operating programs, including Permanent Fund dividends
• $37 billion went into savings, mostly in the Permanent Fund and the Constitutional Budget Reserve
• $31 billion provided tax relief for households, which pay no state income or sales tax 
• $19 billion provided tax relief for non-oil businesses, which pay less than half of the taxes they'd pay if their taxes made up the same share of revenues as in other states

ISER concludes that, while other economic drivers are critical to Alaska's economy, Alaska's future prosperity depends on continued oil production - because none of the other economic drivers can replace the economic value of oil. There is still a lot of oil on the North Slope and offshore, but how much of that oil is produced will depend on a number of factors - including politics. ISER suggests that Alaskans focus on a strategy to maximize the long-term benefits, considering the following:

• Alaskans need to have realistic expectations about future oil production - we aren't likely to have another Prudhoe Bay
• Policy makers need to find the "sweet spot" of oil taxation that provides maximum long-term benefits in oil production, employment and state revenues
• Alaska's leaders must resist the temptation to use the state's oil wealth for economic diversification projects, considering the state's lack of past success.

 

Video Clip: John MacKinnon on Expenditures and Taxes in the Oil and Gas Industry

Associated General Contractors’ Executive Director John MacKinnon discusses the seven-year-trend of expenditures in the oil and gas industry, how that money is being spent, and how it affects the state’s economy and the construction industry. This was presented at AGC’s annual Alaska Construction Spending Forecast in February 2011. Click here for the full report.

Marks: Large Pipeline Returns More to Alaska

In a report released February 2 commissioned by the Office of the Federal Coordinator, Roger Marks examines the economics of a large scale natural gas pipeline to the Lower 48 compared to a state-subsidized in-state gasline.

Tax and royalty revenues would be much higher with the large line to the Lower 48, because the mainline would carry much larger volumes of gas at lower prices. The report shows that a $2 wellhead price for gas (or $7 sales price in the Lower 48), the annual public revenues would be $326 million for an in-state line and $2.3 billion for a mainline. If prices are higher, say a $5 wellhead price, the mainline would generate ten times the public revenue of an in-state line, because the production tax for in-state gas is currently fixed at a specific amount regardless of price.

The price of gas to Southcentral consumers would also be less with a mainline than an in-state line, because the gas would travel half the distance to Southcentral on the mainline with its significant economies of scale. Costs to Fairbanks would be even lower, because the gas would come directly from the mainline without requiring construction of a spur line.

Finally, the much larger volumes of gas that can be shipped on the mainline should spur additional North Slope exploration for both gas and oil. Read the full report here.