By Mark Edwards
Each year, Northrim Bank publishes the Alaska Economic Update. It is an opportunity to review the past year as well as look forward to the current year in regards to oil prices, jobs and housing. We will break the report into four sections and will post the full report in our ‘Resources’ section for your convenience.
2015 is generally predicted to be a flat year for the Alaska economy. Some segments like government, construction and professional services are likely to shrink, but these losses will be offset by gains in tourism, health care and retail. This will result in no growth in the job market and population will likely remain at its current levels. Historically low long-term interest rates and low levels of building activity are expected to keep the housing market stable.
The largest issue looming is the dramatic fall in oil prices. The current low price environment has many people rightfully concerned about the possible impacts on Alaska’s economy. After averaging over $100 a barrel for three and a half years, Alaska has been experiencing prices as low as $45. As of March 17, 2015, it is at $47.50. However, based on currently available information and analysts’ estimates, prices should begin to increase this year. The over-supply of oil that led to the recent price drop should moderate as higher cost producers are not able to operate profitably. Continued global demand for energy is expected to move prices higher by this summer when excess inventories are consumed. Prices in the $60 to $80 range should keep long-run capital investments from the energy industry stable. Oil production levels are expected to be stable through 2017.
State government will have to make prudent spending cuts - Arguably, the most impacted sector from a decline in the price of oil is the State of Alaska government. We are the most structurally imbalanced government in the country in terms of the diversification of revenue sources. In fiscal year 2014, 88% of the state’s unrestricted spending came from oil taxes and royalties. On a positive note, this does not include the $11.5 billion in revenues from other sources such as Federal government contributions to the state and returns from our investment portfolios.
Over $52 billion has been saved in the Permanent Fund and it grows despite the roughly $800 million a year spent on dividends for residents due to investment returns and continued deposits from ongoing natural resource projects in Alaska.
Additionally, the state has over $50 billion saved in other investment accounts. The largest portion, $28 billion, is reserved for the retirement system obligations for state employees. Other funds are dedicated to specific department operations, such as $1 billion for airport bonds, $1 billion in the power cost equalization endowment fund to subsidize rural energy costs, $586 million in the public school trust fund and many others. To balance an estimated $3 billion budget deficit this year the Legislature can draw from the $11 billion Constitutional Budget Reserve, $3 billion in the Statutory Budget Reserve, and $5 billion was in the General Fund at year end 2014.
The current budget deficit is expected to force the Governor and Legislature to freeze the growth in the operating budget and cut the capital budget. Research from UAA’s Institute of Social and Economic Research (ISER) has confirmed the widely held belief that the state government has been spending in excess of its long-term sustainable levels. The Gross State Product in Alaska is $51 billion. A $1 billion reduction in state spending would reduce aggregate demand in our economy by about 2%. A positive way to look at this would be despite government cuts we would still have a $50 billion economy. Most analysts predict the reduction in state spending will be lower, in the $500 million range. The new Governor has signaled he is taking the issue seriously, and will proceed with a measured approach, so as not to exacerbate the problem.
Stay tuned for future posts. The next post will include updates on jobs, unemployment rates, and population.
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