Alaskanomics

Norway's Oil & Gas Policy a Success; Mature Fields a Challenge

Norway and Alaska face similar challenges and opportunities in management of their petroleum resources. Kjell Pedersen, President and CEO of Petoro, the company that manages the Norwegian government's offshore oil business, credited Norway's petroleum policies for the success of the industry there. In a presentation to an international conference, Pedersen said the keys to that success were:

• Acknowledging the value of the international oil companies (IOCs). Government politics, rules and regulations acknowledged the competence of these companies, appreciated their ability to take great financial risk, and matched that risk with a business-like decision making process.
• Predictable fiscal policies. The Norwegian government provided a predictable framework and shared risk with the companies through a carefully designed tax system coupled with direct government ownership of national oil companies.
• Robust oil and gas industry. The government was a key player in creating an environment where competition and diversity of technology, experience and competence was combined with extensive cooperation to build a strong support industry.
• Sound resource management to promote maximum recovery and protect environmentally sensitive areas.
• Establishment of an oil fund to share the wealth with future generation, while keeping major international oil companies active in the country.

Pedersen also discussed the challenges of declining production in mature fields, which will require heavy investment to reach their potential. These investments may have lower returns, and may not compete favorably with other IOC investments around the world. Pedersen believes that new, lower cost technologies are one solution.

Urban Alaska Leads the Nation in Broadband Internet Access

A new report released this month by the U.S. Department of Commerce and the National Telecommunications and Information Administration (NTIA) found that 77% of Americans used the internet in 2009, with broadband internet usage growing from 9% in 2001 to 64% in 2009. The report was based on a special supplement to the U.S. Census Bureau's 2009 Current Population Survey.

Urban Alaska leads the nation in broadband internet access, with 79% of those households using broadband to access the internet. Rural Alaska households are 15th in the nation, and right at the national average, with 62% having broadband access. For this report, Anchorage, Fairbanks, Juneau, Ketchikan and Kodiak were considered "urban" and the rest of Alaska "rural."

Alaska is virtually tied with Utah to lead the nation in "anywhere" internet usage (in home and out of home), at 86% of households. Detailed tables are available from the NTIA.

Economic Downturn Widespread Among States in 2009, but Alaska Avoids the Recession

The Federal Bureau of Economic Analysis finally released the 2009 Gross State Product (GSP) results for all 50 states. This is the state version of the common GDP indicator nationally. National declines averaged a real loss of 2.1% after factoring in the effects of inflation. However, Alaska was one of only 10 states to show growth in 2009, finishing the year with real GSP gains of 3.5%. This ranked Alaska 4th best out of 50 states behind Oklahoma, Wyoming and North Dakota. Alaska also placed 3rd when rating GSP per capita.

Nationally, the largest losses were a result of economic slowdown in the construction sector and durable goods manufacturing such as automobiles, furniture and appliances. Hardest hit by these forces were Nevada (-6.4%), Michigan (-5.2%), New York (-4.3%) and Arizona (-3.9%).

States like Alaska that grew in the midst of the national problems had one thing in common, natural resource development. Oil, natural gas, agriculture, forestry and fishing all helped make positive economic contributions in 2009 to a handful of states.

Apart from natural resources, Alaska was also supported by increased government expenditures both from the Federal government and a large state capital budget. Government spending remained strong into 2010 and is expected to continue in 2011, but is less certain thereafter. Financial services and oil & gas contributed to Alaska’s GSP gains in 2009, though each of these sectors has seen job loss in the first nine months of 2010 and may not be a source of growth in the current year.

This report has traditionally been released in June of each year and is slated for June 7, 2011 next year. It is unclear why the report was delayed until late November this year. The full report can be found at: http://www.bea.gov/newsreleases/regional/gdp_state/2010/pdf/gsp1110.pdf

Is Alaska's Timber Industry Dead?

In a presentation at the Resource Development Council's conference today, Owen Graham of the Alaska Forest Association, asked that question as he outlined the challenges facing the timber industry in Alaska. The industry employed nearly 5,000 people in 1990 but employs just over 500 today. The federal government owns more than 50% of the forests in Alaska - 94% in Southeast Alaska - and timber sales have been consistently challenged by conservation groups. Now nearly 80% of Alaska's timber industry employment relies on timber from state and private lands, but there is not enough timber on those lands to support a strong industry. "With a reliable timber supply, we could quickly rebuild our timber industry in Alaska," said Graham. 

Federal forest management practices are also a concern for Alaska's timber industry, according to Graham, who gave examples of thinning projects that remove valuable timber to create browse for an already healthy deer population at a cost of $200,000 per deer, to habitat projects where logs are "beaverized" (cut to look like a beaver chewed them down), to newly announced transition policy to harvest "young growth" timber that Graham says is not yet at its peak harvestable age of about 100 years. 

Graham recommended that the State advocate that 10% of federal forest land be turned over to the State to manage in perpetuity to support the timber industry.

Value of Alaska's Salmon Harvest Highest in 18 Years

The Alaska Department of Fish and Game released preliminary estimates for the 2010 commercial salmon harvest. At $553.9 million, the value of the salmon harvest was the highest since 1992. Bristol Bay and Prince William Sound accounted for 55 percent of the total value. Preliminary average prices increased for all species of salmon compared to 2009, continuing a trend of price recovery. The average price for Chinook salmon, at $3.44 per pound, was more than three times the price for sockeye ($1.11) and coho ($1.05) salmon. The 2010 estimates are preliminary and will be revised in 2011.  

Risks, Costs increasing for mortgage loans

By Barbara and Clair Ramsey 

If you have been waiting for house prices to drop more you risk losing out. Flexible buyer-financing rules are changing. Loans will be harder to get and require more upfront cash.

Change 1: Seller-Paid Closing Costs
Sellers will no longer be able to pay up to 6 percent of the buyer's closing. New Federal Housing Administration rules have reduced seller's contributions to 3 percent maximum.

On a $200,000 home loan, sellers can only contribute $6,000 versus the previous $12,000 toward buyers' closing costs, reserves and repairs. Buyers must still have 3.5 percent of their own funds for the down payment.

Change 2: Mortgage Insurance Premiums
Mortgage insurance protects lenders if the buyer defaults. Buyers pay into a reserve with an up-front fee and in each monthly mortgage payment. FHA increased the annual premium from 0.55 to 0.85 percent for loans with 5 percent to 20 percent down payments. For loans with less than 5 percent down, the annual premium increased from 0.55 to 0.90 percent. The average buyer must pay this in their monthly mortgage payment until the loan-to-value reaches 78 percent AND made five years of mortgage payments.

Change 3: Credit Scores
Previously Buyers with low credit scores could qualify for an FHA home loan without penalty. FHA can increase the interest rate and down payment for low credit score buyers. On a $200,000 loan, a 3.5 percent down payment of $7,000 could increase to $20,000.

Change 4: Condominium Approvals
Condo projects are under a more intensive national review. This could hold up your purchase if an association is not proactive. A few must-have criteria include at least 70 percent of the units be owner-occupied and less than 15 percent of the units in foreclosure. Without financing approval for a condo project, seller- financing or cash are the only alternatives.

Less House for Same Money
These are just a few of the risks of inaction. Interest rates will start to rise. For every 1 percent increase in interest rates, you lose 10 percent in borrowing power to keep the same monthly payment. So the longer you wait, the less you will be able to borrow if you want to keep the same monthly payment.

Barbara and Clair Ramsey are industry leaders in residential real estate marketing in Alaska.

Alaska's Unemployment Insurance Fund one of few solvent

Alaska’s Unemployment Insurance Trust Fund is one of just a few state unemployment insurance funds that are solvent, with a balance of $257 million. As of November 2, 31 states have borrowed nearly $41 billion from the federal government to fund their unemployment insurance programs. Alaska is one of three states where employees help fund the trust, with employers paying 73% of benefit costs and workers the other 27%. The other two states with employee contributions, New Jersey and Pennsylvania, have borrowed $1.7 billion and $3 billion from the trust fund, respectively. Alaska's fund is the source of 26 regular weeks of unemployment benefits; the Federal government pays for extended benefits beyond 26 weeks. For more information about Alaska's Unemployment Insurance Trust Fund, see the November issue of Alaska Economic Trends, the Alaska Department of Labor's monthly publication.

Economic Effects of Drilling Moratorium

An Inter-Agency Economic report published in September estimated the economic effects of the deepwater drilling moratorium on the Gulf Coast economy. The study found that a six-month moratorium would result in 8,000 to 12,000 fewer jobs in the Gulf Coast, with employment effects falling more heavily on smaller businesses, and total operator spending would be reduced by $1.95 billion. The study concluded, however, that the job loss and spending cuts would be temporary, and that spending on cleanup would replace some of those jobs and dollars. Critics of the Inter-Agency report note that it significantly and arbitrarily adjust impacts downward, and although the moratorium was lifted two months early, few shallow water, and no deep water, permits have been issued. The moratorium has affected and will continue to affect Alaska's economy, but the effects are hard to quantify, according to Institute of Social and Economic Research economist Scott Goldsmith. "It’s a lot easier to track the economic effects in the Gulf because of the size of the industry.  Here we cannot just look at employment or unemployment trends.  We have to track the activities of the particular companies active or potentially active offshore.  This would be Shell and BP.  Shell obviously was impacted.  They have lost at least another year of exploratory drilling at a cost of several hundred jobs," said Goldsmith.