Alaskanomics

Department of Labor Employment Data

By: Scott Goldsmith

Alaska wage and salary employment continued to grow in the first half of 2015 according to the latest information from the Alaska Department of Labor. Increased private sector employment more than offset a decline in public, mostly state government, employment. However growth slowed over the first two quarters of the year and will probably turn negative before the end of 2015 as the construction and petroleum industries contract.

Construction employment was higher for the 4^th year in a row, but will soon start to contract due to both a decline in state government capital spending and reduced spending by the petroleum sector. This is evident from a decline in employment in professional services, a leading indicator of activity in the construction sector, which began last year.

Petroleum employment peaked at the end of 2014 and started to fall off at the beginning of this year. The decline will continue due to the Shell pullout and the completion of the Pt. Thomson project.

Employment in health care, which has been a major contributor to growth for several years, has not increased in two years and is unlikely to be a strong economic driver in the near term future.

However the decline in federal civilian employment since 2010 may be nearing an end, and this will help to stabilize the economy.

Resource Development Council Conference Wrap-up

The Resource Development Council hosted its 36th Annual Alaska Resources Conference on November 18 and 19 in Anchorage. Each year, members of the resources industry gather to discuss the past year’s accomplishments as well as look to the future of tourism, fisheries, oil and gas, mining and forestry.

Governor Walker opened the conference with a few words about his desire to make sure that there is more oil in the pipeline for all Alaskans. He was encouraged about the exciting time in the mining industry and the good steps being taken in the AKLNG project. The Governor also noted that he would be soon releasing his plan for a more sustainable budget and it would be without sacrificing Alaska. He assured attendees that he would not shy away from the tough decisions that are part of his job description. He also noted that he would stay strong in his message to Washington DC and that Alaskans need more access the natural resources in our state.

The conference continued with the updates from the industry, including an overall update from State of Alaska economist, Neal Fried. Presenters shared a lot of what attendees already knew and gave a sense that while there are struggles with the resource development industry, that there are also things to be excited about and there are opportunities available.

News from the oil and gas industry was understandably less optimistic as it has been in past years. Presenters from ConocoPhillips and BP discussed the work being done to progress the AKLNG project. Both companies want to continue the momentum that was gained during the special legislative session. All parties must be aligned to assure success for the project.

The Arctic, Federal overreach, Pebble Mine and Point Thomson rounded out the day’s discussions. Due to the United States’ Chairmanship in the Arctic Council for the next two years, the world is focused on Alaska. Many different interests throughout the state and the rest of the US are competing for the attention of the Arctic Council and the world.

Day two of the conference started with a session titled, “Real Solutions to Alaska’s Budget Crisis”. It included a presentation about the necessity to look at state spending and how it relates to a sustainable budget. Everyone agreed that there were no easy answers when it comes to the State budget. Spending and new revenue will need to be part of the equation and the speakers agreed that something would have to be done sooner, rather than later. Today’s budget crisis is much different than the last one the state faced. A concern is the fact that we are depleting budget reserves without anything to refill those reserves on the horizon. Using the earnings from the Permanent Fund while keeping the dividend, buys time to work on a more sustainable solution. Not doing anything in 2016 damages the ability to come out of this crisis in the future. Speaker Mike Navarre, Mayor of the Kenai Peninsula Borough, noted, “There is no perfect plan and we cannot be crippled while waiting for the perfect plan”.

The day continued with discussions about oil tax credits, the progress being made in Cook Inlet, mining and a wrap-up on work on the AKLNG project. The increased production in Cook Inlet has allowed Southcentral Alaska to have a needed gas supply. It was also stated that discovered but not-developed fields could bridge the gap until the AKLNG project comes online in the mid-2020s (if approved).

AKLNG is moving forward and the project received the right to export to both free and non-free trade countries. The Alaska Oil and Gas Conservation Commission (AOGCC) has supported gas offtake and carbon dioxide reinjection. Both of these are good steps in moving forward to a successful project. While there are many more steps to take and hurdles to overcome, the many are hopeful that the project will proceed and be a success. At the end of the day, we all need to do what needs to be done to ensure a successful project to serve Alaskans for many years to come.

For complete conference information and presentations, visit http://www.akrdc.org/november-conference

Oil likely to stay below $80 a barrel until 2020, IEA forecasts

From Larry Persily's Oil and Gas News Brief

(Financial Times; London; Nov. 10) - The oil market will remain oversupplied until the end of the decade as the push for cleaner fuels and greater efficiency offsets the effect of lower prices, the world’s leading energy forecaster said. In its annual outlook, the International Energy Agency said oil demand would rise by less than 1 percent a year between now and 2020, slower than necessary to quickly mop up an oil glut that has driven prices to multiyear lows.

The slowdown in oil demand growth follows a near 15-year surge in consumption, driven by the rapid industrialization of China and other emerging market economies. But Beijing is now moving away from dirtier fuels and to less energy-intensive growth as it heads toward a more consumer-led economy. “We are approaching the end of the single largest demand growth story in energy history,” Fatih Birol, executive director of the IEA, told the Financial Times.

“Demand is not as strong as we have seen in the past as a result of efficiency [and climate] policies [globally],” he added, saying the growth in renewables will further restrict demand for oil. The IEA does not expect oil to reach $80 a barrel until 2020 under its “central scenario,” as excess supplies are slowly soaked up. After 2020, oil demand growth is expected to grind almost to a halt, increasing just 5 percent over the next 20 years, the IEA said. In its “low oil price” scenario, the agency said prices would stay close to $50 a barrel until the end of the decade.

Walker Administration's Fiscal Plan

By Tim Bradner

Gov. Bill Walker will roll out his Fiscal Year 2017 budget proposal fairly soon. The statutory deadline is Dec. 15 but the governor is working to get parts of it out earlier. What will really grab peoples’ attention; however, are revenue measures Walker says he will propose, including some form of broad-based tax.

The governor is also working on a new way of structuring state finances. It would fund government partly from Permanent Fund earnings, which would bring more stability to state finances. The state budget is now mainly financed by oil revenues that can be unpredictable and volatile, as recent experience has shown.

The fiscal plan has been under development for several months and was rolled out as a concept by state Attorney General Craig Richards in a briefing to legislators on Oct. 28. Lawmakers were in Juneau for a special session on natural gas issues.

The fiscal plan is a work in progress, Richards admitted, but it essentially involves bulking up the Permanent Fund by diverting certain oil revenues that now go to the state General Fund and funding the state budget from a portion of earnings of the Permanent Fund.

The governor’s team is still studying several ideas for a payout mechanism from the Permanent Fund, but some of the ideas are based on variations of a percent-of-market-value formula, similar to that used by many large endowments.

Under this approach, a percentage, say 4 percent or 5 percent, of the total market value of the fund would be tapped for the budget. This should allow enough earnings to be retained in the Fund to account for inflation. Another payout mechanism is a fixed sum paid to the general fund, with this amount inflation proofed. There are variations of this, too.

Technically the payout would actually come from the Earnings Reserve of the Permanent Fund, an account in which income from the Fund is deposited. The Legislature cannot appropriate funds from the principle of the Fund but money in the earnings reserve can be used.

These ideas aren’t really new–similar notions have been discussed for years and there are other plans out there, like one proposed by University of Alaska economist Scott Goldsmith–but the matter is urgent now given the state’s financial situation.

The governor is being given credit for stepping forward with a concrete idea, and it is certain to spark serious discussion in Juneau.

What’s also in Walker’s proposal, however, is a change in the way Permanent Fund dividends are financed and this would have the effect, in the near term at least, of reducing the annual dividend and making more money available for the state budget.

The plan described by the Attorney General Oct. 28 would have the dividends funded by a portion of state oil royalties (the remaining royalties would go to the Permanent Fund, as some now do). Currently the dividends are financed from the Fund’s earnings, with the money actually taken from the earnings reserve.

This would be a fundamental change, severing the connection between the dividend and its amount from the financial performance of the Permanent Fund. Instead, citizens would have a very direct connection with state oil revenues. Some are viewing this as good–giving Alaskans a direct stake in the performance of the oil and gas industry–while others view it more critically. Separating the dividend from Permanent Fund performance could lessen citizens’ interest in the Fund. Currently, the direct connection with the Fund performance acts as a brake against any unwise investments the trustees might make or any indirect raid on the fund by the Legislature (while the Fund cannot be spent directly it can be used as collateral in state financing, such as for a gas pipeline, which may or may not be wise). However, under current oil market conditions the amount of the dividend under the governor’s plan, if it were adopted immediately, would be roughly cut in half from the 2015 dividend amount. 

There is certain to be a lot of discussion on all aspects of this and other proposals for solving the state fiscal gap. Legislators are being very cautious in their reactions and that no one has yet voiced sharp criticism is encouraging.

The state’s credit rating agencies gave praise to Walker for at least offering up something, although they noted that his plan, as now designed, wouldn’t completely close the $3 billion deficit. New revenue sources will still be needed.

So this is a start, and possibly a good one. There’s a lot more to come. But solve the problem we must, and soon.

 

Tim Bradner is a natural resources writer for the Alaska Journal of Commerce