Alaskanomics

Video Clip: Governor's 1 Million Barrel Challenge for Alaska' s Oil is "Ambitious, but Achievable"; Sullivan dismisses "how low can you go" debate

In a speech on April 3, DNR Commissioner Dan Sullivan talked about Alaska Governor Sean Parnell's goal to have 1 million barrels of oil down the Trans-Alaska Pipeline within ten years. In the video clip below, Sullivan notes that while the governor's goal is ambitious, it is achievable - but it will require meaningful tax reform and cooperation with the federal government. Sullivan also referred to debate going on in Juneau at the time as a "weird focus on how low can we go."

Alaska Salmon Harvests Strong; prices and values up "dramatically" since 2002

In a presentation at ComFish2012, Gunnar Knapp presented data on Alaska's commercial salmon fishery that showed significant gains in harvests, prices, and values - and a more diverse market for Alaska's salmon exports. Knapp is a Professor of Economics at UAA's Institute of Social and Economic research (ISER), and a fisheries expert.

Of the nearly 800 million pounds of salmon harvested in 2011, about half was pink salmon, one-third sockeye, and 15% chum, with lesser amounts of chinook and coho. Sockeye salmon is more valuable than pink - with an average price per pound of $1.20 for sockeye compared to 43 cents for pink - so sockeye salmon was the value leader for Alaska. The "ex vessel" (landed) value of Alaska's total salmon catch is estimated to be $603 million for 2011, with sockeye salmon valued at $296 million, pink at $170 million and chum at $93 million. The ex vessel value was $164 million in 2002; the increase in value is a function of increased harvests as well as much better prices.

According to Knapp, better prices for Alaska salmon are a result of better marketing, new product types and improved quality. At the same time, world prices also increased for both wild and farmed salmon, and currency values also contributed to better prices.

FERC Approves First LNG Export Plant in Lower 48; Alaska currently has nation's only export facility

The Federal Energy Regulatory Commission (FERC) has approved the first LNG export facility in the Lower 48, the second export facilitly in the U.S. The plant will be located in Louisiana at an existing LNG import facility. Because the facility will export natural gas to foreign countries, the project required approval from the Department of Energy (DOE) to export the gas; that authorization was issued in 2010.  The DOE found that there were "substantial evidence of economic and public benefits" to grant the authorization.

Alaska currently has the country's only LNG export facility, in Kenai, which is owned and operated by ConocoPhillips. The plant was constructed in 1969 and supplies natural gas under contract to two Japanese utilities. The company had announced in 2011 that the plant would be shut down, but a ConocoPhillips spokesperson said today that the plant is now operating and will deliver four cargoes in 2012, the first in May.

In an order issued April 16, FERC has authorized Sabine Pass Liquefaction and Sabine Pass LNG, subsidiaries of Cheniere Energy, to liquefy and export 2.2 billion cubic feet of U.S. natural gas annually.

In a press release issued by Cheniere, the company states that it is finalizing financing for construction of the first two trains of the new LNG facility. They expect construction to start this year, with the first train to start operations in 2015/2016.

Oil Industry Profit Margins 6.7% in Q3 2011; Pharmaceuticals lead with 22.2%

Headlines and political speeches, even those from President Obama, focus on the oil industry's "record profits" but forget to tell the rest of the story.

Because the industry is one of the world's largest, and its revenues are based on the current high price of oil, profits in absolute dollars may indeed be setting company records - but the percentage of profits on those revenues is modest compared to other industries. An American Petroleum Institute publication, Putting Earnings into Perspective, used government filings and other data to report third quarter profit margins (earnings per dollar of sales) for a number of industries. The chart below shows that oil industry profit margins, at 6.7% in the third quarter of 2011, were lower than many other industries:

 

Alaska's Spending, Earnings on a Collision Course; oil production declines while budget grows

I have watched this year’s oil tax debate with dismay. Some of Alaska’s senators appear to be working harder to score political points than to craft wise public policy.  For more than a decade, two critical issues have threatened the future of Alaska’s economy – declining oil production and unrestrained growth in state spending. For more than a decade, Alaska’s business leaders have called on our elected officials to manage these issues through a comprehensive fiscal policy addressing both revenues and spending. Unfortunately, we continue to see the same short term thinking that limits Alaska’s economic growth and prosperity for all Alaskans.

Oil production has declined by more than a third since 2006. At the same time, unrestricted general fund spending, which is financed almost entirely with petroleum revenues, has more than doubled. These two lines are going in the wrong direction, and the longer the legislature waits to turn them around, the more difficult it will be to bridge the gap between state government’s insatiable appetite for money and funds available from fewer and fewer barrels of oil. 

I commend the governor for his vision of one million barrels per day down the pipeline – it’s a vision that attracts commitment, energizes people and galvanizes action. It’s the vision of a leader, and one that all Alaskans should embrace. Some of our legislators would rather poke holes in the vision than work to make it happen; claiming that production decline is inevitable and no state action can slow it down. Yet we have billions of barrels of oil still in the ground and skilled Alaskans who know how to produce it if the right fiscal policies are in place.

On the spending side, the governor’s current budget proposal reduces general fund spending by 2%, a very positive step in the right direction. However, some of the same senators who are dragging their feet on oil tax reform have announced that they plan significant increases in the state’s budget above the governor’s proposal.

Legislators who want to keep spending talk about oil tax reform as if the only outcome will be reductions in state government revenue. They seem to believe that all the other variables will remain the same – oil prices will stay high and production will continue at forecast levels despite an uncompetitive tax structure.  These short term thinkers don’t calculate the bounty – not only to the state treasury, but to Alaska’s citizens and small businesses – that will come with increased industry investment and increased oil production.

It’s very difficult for legislators to have long term vision – particularly in a year where 59 of 60 legislators must run for reelection. The Senate’s oil tax reform bill appears to be designed to tick the box so they can tell their constituents they fixed an uncompetitive oil tax. Unfortunately, their bill will not move the needle to drive meaningful investment to slow or stop declining production – much less meet the governor’s million barrel challenge.

Alaska’s economy is dependent on oil production and will be for many years to come. We are in the oil business, where time horizons are long, and investments made today may not pay off for many years, if at all. We need leaders who understand the business and those time horizons. We also need leaders who can plan for the future when it comes to state government spending. Instead of focusing on maximizing state government’s take in the short term, they must focus on Alaska’s people, and Alaska’s economy, in the long term.

Some of our legislators have discounted the views of Alaska’s business leaders when we have called for a competitive tax structure to attract private investment and a rational fiscal policy for public spending. If the philosophy of increased private investment and lower government spending does not resonate with them, perhaps the hopes and dreams of future generations of Alaskans will. If our leaders believe that there are plausible alternatives to our petroleum economy going forward, all Alaskans need to see their plans.

Editor's Note: This opinion piece appeared in the Sunday, April 8 Fairbanks Daily News-Miner.

Alaska's Population Turnover Among Highest in Nation; 30,000 arrived, fewer left in 2010

The April 2012 issue of Alaska Economic Trends, published by the Alaska Department of Labor, analyzes Alaska's "highly migratory" population with data from several sources - the Alaska Permanent Fund Dividend, IRS data, and census data. IRS data, from addresses on federal tax returns, shows that 30,000 people moved to Alaska from 2009 to 2010, and about 27,000 moved out of Alaska. The states with the highest number of residents moving to Alaska include:

• Washington with 2,804
• California, with 2,674
• Texas, with 2,266
• Florida, with 1,292

The article also notes that Alaska consistently attracts more people in the 21 to 35 age range than it loses, and 72% of 18-year-old PFD applicants are still in Alaska five years later. About 38% of Alaskans were born here, up from 31% in 1960 - but that is much lower than the national average of 59%.

Alaska Per Capita Income Rises 2.9% in 2011

The federal Bureau of Economic Analysis reported this week that personal income in Alaska rose by $1.3 billion to $45.5 billion in 2011.  This equates to a 2.9% improvement on a per capita basis.  That ranks Alaska as the 9^th best out of the 50 U.S. states in per capita income.  The 4^th quarter of 2011 was the twelfth consecutive quarter of income growth in Alaska.  Alaska’s per capita income of $45,529 was 9% larger than the U.S average of $41,663.

Personal income is tracked in three major categories.  The largest improvement for Alaska in 2011 was from net earnings, which increased by $972 million.  This measures the wages earned by workers, any supplemental company distributions and proprietor’s income.  The second major income category to improve in Alaska was a $275 million increase from dividends, interest, and rental income.  The final category is government transfer payments.  This does not measure government workers, but rather payments from government programs where the beneficiary did not provide any service to earn the money.  This increased by $69 million in 2011.

The report also details which sectors of the economy contributed the most to the growth of income in Alaska.  Health Care added the largest amount to personal income in 2011, growing by $197 million.  Professional, Scientific and Technical Services improved by $140 million, followed by Mining at $114 million, Military was up $99 million and Transportation and Warehousing added $75 million. 

Two major sectors reported declines in total income in 2011.  The Federal Government income was $10 million lower and Construction related income decreased by $62 million.

Alaska's "Nest Egg" Grows along with State Spending; "fiscal burden" of excess spending passed to future generations

Alaska's "nest egg" of money in the bank and future petroleum revenues grew by $29 billion in 2011, according to a web note by Scott Goldsmith with the UAA Institute of Social and Economic Research (ISER). However, state spending in FY 2012 is likely to be $7 billion - $800 million more than ISER's research shows is sustainable. Spending more than the state's petroleum revenues can sustain passes a fiscal burden to future generations and reducing the size of the nest egg. Unless the state reduces spending or finds alternative sources of revenue, the report notes, that fiscal burden will grow every year and the nest egg will shrink at an accelerating pace.

If the state's current and future petroleum revenues were treated as an asset from which the state spent only the earnings, Alaska's wealth would be preserved indefinitely for future generations even as our population grows. The report shows that this fiscal burden is much more sensitive to changes in state spending than to changes in revenues.

The report's research is part of ISER's "Investing for Alaska's Future" initiative, funded by a grant from Northrim Bank. As noted in the report, the opinions in the report do not necessarily reflect those of Northrim Bank.