An abundance of great speakers addressed RDC’s 35th annual Alaska Resources Conference last month, and I don’t have enough space to even get started on recapping. So rather than try, I’m going to focus on one telling moment for me that altered my perspective on the challenges ahead for our resource dependent economy in Alaska. Hearing one word changed my understanding of the recent 35 percent reduction in crude oil prices. I had previously thought these lower prices were short term, but now I realize they are likely a new normal. It is a very real possibility these lower prices will last for years, and they may go even lower.
Patricia Mohr, Vice President and Economics and Commodity Markets Specialist for Scotia Bank, was willing to travel clear from Toronto to present an indepth keynote luncheon presentation on the outlook for mineral and energy commodity markets. Ms. Mohr helped connect the dots on the complex web of interrelated global forces that impact commodity prices in the mining and energy sector. This was a timely topic for conference participants in light of the recent drop in the price of crude oil and the multi-year slump in the minerals sector.
The trends in global GDP, China, Eurozone, and liquidity was all very interesting. What jumped out was when Ms. Mohr said a single word, “structural.” She explained that we are seeing structural change in the global trading of crude oil. The last time I heard a commodities specialist talking about structural change was in 1997 when the floor fell out of the market for Alaska forest products in Japan. Those structural changes in the market resulted in lasting changes in the pricing structure (for the worst) and negatively impacted many forest landowners and operators in Alaska.
Commodity markets will always be cyclical, however, structural changes are game changing over longer periods where the basic way the market is functioning changes. Just a few years ago there was much discussion of “peak oil.” Thanks to the shale revolution leading to dramatic increases in North American oil production, combined with global economic malaise and weak demand, we are now in a global oil supply glut with little end in sight.
U.S. oil production keeps exceeding expectations, and other oil dependent nations are ramping up production to offset lost revenues, and some in hopes of slowing U.S. production by driving prices even lower. No one can predict where this is heading, but when experts like Ms. Mohr start talking structural change, fasten your seat belts, this lower priced oil may be here for an extended period.
The good news is increased North Slope and Cook Inlet oil and gas activity is stemming the production decline in both basins. And, thanks to SB21, the impact of low oil prices on state revenues is considerably less than had we stuck with ACES. Former Governor Parnell, the Alaska Legislature and Alaska voters deserve kudos for the foresight in mitigating the downside risk to the treasury that ACES imposed.
I also have to commend Governor Walker for starting a public discussion on the budget challenges resulting from low oil prices. Before he was even sworn into office, then Governor-elect Walker convened a very diverse group of Alaskans for his transition summit. The first order of business was to address our dire fiscal situation. If current trends continue, the state could burn through its reserve accounts in three short years. Addressing these tough issues requires we all understand them and Governor Walker’s transition forum was a great start.
RDC has been advocating for a long-term fiscal plan for over a decade without much to show for it. Perhaps it takes a crisis to take action. Now it is imperative we set a course for a sustainable fiscal system that isn’t so vulnerable to the whims of global commodity forces over which we have no control. We need to reassess the core functions of state government and how we are going to pay for them without undue burdens on future generations. And through all this, we must insure that Alaska is a competitive place to invest and grow our resource economy.
The temptation of policy makers to look to fisheries, tourism, forestry, and mining as potential sources of new tax revenues needs to be tempered by consideration of the consequences of additional burdens on these industries. Our focus should be on growing these industries so we have more success stories like Red Dog and Greens Creek mines, both major tax payers to local and state governments that have transformed regional economies for a quarter century and are still going strong. While North Slope gas holds promise, it too must compete on the international stage and needs predictable and competitive fiscal terms to be monetized.
Our state fiscal plan should include initiatives to grow revenues from resource projects by growing the pie. If we want more mining revenue, develop more mines! Consider the economic contribution of the Red Dog Mine in Northwest Alaska. Red Dog just celebrated its 25th anniversary this year. This one project has resulted in more than $119 million in revenues to the Northwest Arctic Borough, $608 million in ANCSA 7(i) revenue sharing across Alaska, 600 direct jobs and 490 indirect jobs with a combined annual payroll of $85 million. In addition, this one project pays 35 percent of the state mining license tax, $208 million to date.
Hoping oil quickly returns to over $100 per barrel is not a prudent strategy. Patricia Mohr traveled from Toronto to tell many of us what we didn’t want to hear. It’s time to get past the denial stage. We are in for some tough times and difficult policy choices. It behooves all Alaskans to recognize our challenges, listen to each other and forge a path forward based on opportunity, growth and sustainability – a path that makes Alaska an attractive place to invest.
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