1

How Petroleum Has TransformedHow Petroleum Has Transformed

the Alaska Economy the Alaska Economy

byby

Scott GoldsmithScott Goldsmith

Institute of Social and Economic ResearchInstitute of Social and Economic ResearchUniversity of Alaska AnchorageUniversity of Alaska Anchorage

ANCHORAGE CHAMBER OF COMMERCEANCHORAGE CHAMBER OF COMMERCE

““MAKE IT MONDAYMAKE IT MONDAY””

July 6, 2009July 6, 2009

Anchorage, AlaskaAnchorage, Alaska

What I want to do today is give you a sense of how Petroleum hastransformed the Alaska economy beyond the obvious statement that most ofus in this room would not be here today but for petroleum.

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How Oil Has TransformedHow Oil Has Transformed the Alaska Economy the Alaska Economy

Primary Financial Support fromPrimary Financial Support from

But first I want to acknowledge the generous support I have receivedfrom NRB and the UA Foundation in support of the research I am goingto report on today. Of course the opinions presented are mine aloneand represent neither the bank or the university.

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A Short Reminder:A Short Reminder:

The Alaska Economy in 1960The Alaska Economy in 1960

• SMALL: 90 thousand jobs

• THIN: limited support businesses

• SEASONAL: summer private jobs 2x winter

• FEDERAL DOMINATION: jobs with fed

• INFRASTRUCTURE UNDERDEVELOPED

• LIMITED REVENUE CAPACITY

Our story starts with a quick look back at the Alaska economy in 1960.This is for both those of us who were not here at statehood and thosewho were, but, as is normal human nature, tend to romanticize the pastand view it thru rose colored glasses.

The reality is that the economy was small, thin, and seasonal. Totalemployment, averaged over the year, was about 90 k. There were fewbusinesses providing services to our natural resource producingindustries or to households. Someone has remarked that in those daysyou had to go to Seattle just to get a haircut. Fishing and constructionassociated with federal spending meant there were lots of private jobsin the summer, but the economy virtually shut down when winterarrived.

Half the jobs, and the most stable, were with the federal government.Transportation, communications, and other infrastructure was primitiveby today’s standards. And finally, there was very limited capacity forpaying the operating costs of running the new state, let alone forbuilding it up to 20th century standards.

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The Alaska State SealThe Alaska State Seal

Hope for economic development rested primarily on the naturalresource extraction industries depicted on the Alaska state seal (onemight call them the seal industries). If you look closely you can seethese included mining, seafood, agriculture, timber, (and seals). I keeplooking for a tourist in the seal, but have not been able to find one yet.

5

660

24

361

0% 25% 50% 75% 100%

PEOPLE

(000)

INCOME

(BILLION $)

JOBS (000)

Alaska Indicators:Alaska Indicators: Then and Now Then and Now

230

3

90

0% 25% 50% 75% 100%

PEOPLE

(000)

INCOME

(BILLION $)

JOBS (000)

Economic growth since statehood has been a success story measuredby jobs, personal income, and population. Employment has increasedby 300% from 90 to 361 thousand. Income, in constant $$$, hasincreased even more rapidly, and population has almost tripled. Notonly is the economy much larger today, its strength is reflected by thefact Alaska is weathering the current national recession much betterthan most of the nation.

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Growth of Seal Industries:Growth of Seal Industries:Not Enough to Account for TodayNot Enough to Account for Today’’s Economys Economy

•Tourism

•Seafood

•Mining

•Agriculture

•Timber

•Air Cargo-5

0

5

10

15

20

25

Tour

ism

Sea

food

Min

ing

Agr

i

Tim

ber

Air C

argo

Job Growth, 1961-2006 (Thousand)

The seal industries contributed to that growth, but can take credit foronly a modest share. This graph shows the increase in the number ofjobs in each of those seal industries (now augmented to include tourismand air cargo.

Tourism, starting from a very small base, has grown by over 20 k jobs,on an annual average basis.

Seafood increased by about 10k, from 7 to 17

Mining from 1 to 2

Agriculture for export has yet to become a reality.

Timber, also expected to be a strong driver at the time of statehood,has suffered an absolute decline in jobs

Air Cargo, building off our locational advantage in the pacific rim, hasadded some 4 k jobs

Taken together these seal industries directly contributed perhaps 30kjobs to the nearly 300k added to the economy since statehood.

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The The ““UpdatedUpdated““ Alaska State Seal Alaska State Seal

Two other economic drivers, not depicted on the state seal account forthe majority of our economic growth--federal spending and petroleum.We might want to amend the state seal to include these drivers if wewant the seal to depict the economic foundation of the state.

Although both these drivers are fascinating, today I will concentrate onpetroleum, and save federal spending for another day.

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Indicators of PetroleumIndicators of Petroleum’’s Importances Importance

80%80%Industrial Property Tax BaseIndustrial Property Tax Base

74%74%Value of Resources Produced 1867-2009Value of Resources Produced 1867-2009

33%33%Gross State Product (Direct)Gross State Product (Direct)

60%60%Private investment spending (Direct)Private investment spending (Direct)

3%3%Oil Sector JobsOil Sector Jobs

85%85%State General Fund RevenuesState General Fund Revenues

Here is a list of measures of the importance of petroleum to theeconomy. They range from a high of 85% of state general fundrevenues to a low of 3% of total jobs. In between are indicators like theone showing that 74% of the value of natural resources produced sincethe purchase from Russia has been petroleum. Given this range, it iseasy to understand that people might be confused about howpetroleum fits into the overall economy of the state.

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What Would Alaska Look LikeWhat Would Alaska Look Like

Today Without Petroleum?Today Without Petroleum?

GedankenexperimentGedankenexperiment

To get at the role of petroleum in the economy, I want to ask thisquestion--what would alaska look like today if there had never been apetroleum industry. And I want to answer it by doing what is called athought experiement (or gedankenexperiment), a technique not socommon to economcs, but one popularized by this famous physicist,and one anyone can try.

My though experiment traces the path of economic growth anddevelopment of Alaska if , for example, on April 1 1968, Alaskansopened their morning papers to find the headline which read –AnotherDry Hole at Prudhoe Bay, companies say we give up. And this cameafter an unsuccessful decade of exploration in Cook Inlet.

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No Production--Part 1No Production--Part 1The Oil PatchThe Oil Patch

The first part of the answer is straightforward and you likely alreadyknow it, since it was presented right here last year.

The state would not have had these jobs associated with exploration,development, production, transportation, refining, and manufacturing ofpetroleum—what I call the oil patch jobs.

That amounts to perhaps 42 k jobs throughout the economy when allthe effects of instate spending by the industry are tracked down andaccounted for.

But these 42 k jobs are only the tip of the iceberg.

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No Production--Part 2No Production--Part 2Government SpendingGovernment Spending

$$$

PETROLEUM REVENUE SPENDING

$$$

STATE GOVERNMENT EMPLOYEES

16 Thousand

LOCAL GOVERNMENT EMPLOYEES

15 Thousand

PRIVATE SECTOR JOBS

18 Thousand

TOTAL JOBS = 49 THOUSAND.

Assumption: All Spent Petroleum Revenues Pay for Operations.

No production also means no petroleum revenues. Those revenuespay the wages of about 31 thousands government workers.Government purchases from the private sector and government workerconsumption purchases in turn support another 18 thousand privatesector jobs, for a total of about 49 thousand additional jobs lost.

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No ProductionNo Production——Part 3Part 3The PF DividendThe PF Dividend

2008 DIVIDEND BASICS

$3,269 Dividend

611 Thousand Recipients

$2 Billion DistributionCOMPARE 2007 EARNINGS (Billion $)

$1.4 Retail Trade$1.6 Federal Civilian$1.7 Construction$1.8 Oil + Mining$2.0 Health$2.2 Military

No petroleum revenues also means no permanent fund, and nopermanent fund dividend. In 2008 the dividend pumped $2 billion indiscretionary income into our economy. It was like having anotherindustry at work because that cash infusion was larger than theearnings of the trade, construction, or even the combined oil and miningindustry. Without this discretionary there would be many fewer jobs intrade and services and other support industries.

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Petroleum and the 3 LeggedPetroleum and the 3 LeggedStoolStool

Job OpportunitiesJob OpportunitiesBusiness OpportunitiesBusiness Opportunities

High IncomesHigh Incomes

Low TaxesLow TaxesLow PricesLow Prices

New PeopleNew People

Public servicesPublic servicesPublic InfrastructurePublic Infrastructure

Business infrastructureBusiness infrastructure

Consumer goods andConsumer goods andservicesservices

PETROLEUM BENEFITS:SPILLOVERS & MATURATION

If we add together the oil patch jobs, the public sector jobs, anddividend jobs attributable to petroleum, they sum to roughly 1/3 of allthe jobs in the economy. That is reflected in the petroleum leg of the 3legged stool representing the foundation of the Alaska economy. Theother two legs of course are federal spending and other resources (orthe seal industries as I have called them).

But we would be missing many of the economic benefits frompetroleum if we only considered the jobs generated in the oil patch andfrom the expenditure of revenues. It is easy to make a list of some ofthese benefits that represent what I would call spillover and maturationbenefits from petroleum. As I will argue, these spillovers have bothstrengthened and increased the size of the other two legs of the stool.Without petroleum not only would there only be two legs, but thoseother two legs would also be considerably shorter.

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• VALUE ADDED

• STABILITY

• SIZE

3 Petroleum Characteristics3 Petroleum CharacteristicsGenerating Spillover BenefitsGenerating Spillover Benefits

I want to concentrate on 3 characteristics of the petroleum industry thathave contributed to these spillover and maturation benefits—valueadded, stability, and size.

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Value Added : State ShareValue Added : State Share

Lighter Tax Burden Greater Public Spending

$54 Billion $52 Billion

$141 Billion

59-08 in 2008 $

SAVE$35

Billion

SPEND$106Billion

State petroleum revenues, thru 2008, have been $141 billion, in today’sdollars. Of that total $35 billion has been saved in the PF and the CBR.We have spent the other $106 billion.

As I mentioned, this spending has created a lot of jobs, but it has alsohad two other important effects. It has allowed us to keep the taxburden low for both Alaska non petroleum businesses and Alaskahouseholds (here estimated at $54 billion), and at the same time it hasallowed us to fund public programs at a higher level per capita than anyother state (an estimated $52 billion).

Of course parsing all that spending between tax breaks and increasedspending is somewhat of a judgement call, and that is why this is athought experiment) but clearly we are talking big numbers here. Whathas this meant for the economy?

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Impact on Resource IndustriesImpact on Resource Industriesfrom Lighter Tax Burdenfrom Lighter Tax Burden

4 XIncrease in Tax Rate

$700Incremental Burden, no Oil$

$900If Oil $ Disappeared

$200 millActual (avg 05-07)

State & Local Revenues fromSeafood, Tourism, Mining, Timber

Think about our seal industries—fishing, tourism, mining, timber,agriculture. Their combined average tax burden in recent years hasbeen about $200 million. If asked to fund their share of the light taxburden of $54 billion shown on the previous slide, their incrementalburden might be $900 million, a tax increase of 400%.

Such an increase would not be possible for some, if not mostbusinesses in these industries. So a higher tax burden would result in asignificant hit to the employment numbers for the mining, tourism,fishing, and timber sectors. How big the hit would be is impossible tosay, but the numbers are sobering.

Remember this is a thought experiment. I am not advocating this!

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Impact on Resource IndustriesImpact on Resource Industriesfrom Greater Public Spendingfrom Greater Public Spending

• CAPITAL SPENDING

• Targeted Development

• General Infrastructure

• Household Infrastructure

• OPERATIONS SPENDING

• CAPITALIZING SPECIAL FUNDS

Our resource industries have also benefited from the high level ofgovernment spending, and not only because our legislators tell us theirappropriations are generating economic development. Some capitalspending specifically targets assistance to resource industries, such asthe assistance provided for the construction of the road at the Red Dogmine. Probably of greater importance is the boost that has come frominfrastructure development that has not directly targeted an industry butrather, like the development of a port, has increased access andreduced costs generally. Also important is the capital spending that isdirected not toward making business more viable, but at making livingin Alaska more attractive—better schools, local assistance, etc. Thismakes it easier to attract a skilled work force.

Spending from the operating budget has also enhanced the viability ofour resource industries through a number of support programs aimed atour seafood, mining, and tourism, and timber industries.

Finally, petroleum revenues have bankrolled aidea, fisheries loanprograms, and other programs designed with economic development inmind.

Together the low tax burden and high level of public spending havegiven our resource industries a boost that has increased theiremployment levels.

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Impact on HouseholdsImpact on Households

from Lighter Tax Burden from Lighter Tax Burden

34%*

$13,150 PerCapita in 2006

* Average State Income Tax Rate to Replace Oil Revenues—1970 to 2006.

Just for perspective, households have also been the beneficiaries of alow (almost non existent) state tax burden and higher publicexpenditures, and this in turn gives a boost to the economy in a numberof ways. To give you a sense of the magnitude of that boost, if all staterevenues from petroleum had instead come out of the pockets ofAlaskans as an income tax, the average rate over the last 30 yearswould have been 34% instead of the 0% we enjoyed.

One of the more interesting economic boosts from this has been thegrowth of the retiree population and the consumer spending that theseseniors pump into the Alaska economy instead of Florida.

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Impact on Stability: Part 1Impact on Stability: Part 1

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1 2 3 4 5 6 7 8 9 10 11 12

0

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1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

1 2 3 4 5 6 7 8 9 10 11 12

Bristol Bay

Denali Borough

As I indicated, when Alaska became a state there were lots of jobs inthe summer, but the economy essentially closed down in winter. Underthose circumstances businesses supporting the resource industries orAlaska households had a hard time taking root. Those seasonalindustries are still with us today, but account for a much smaller shareof the total.

On the left are the graphs of monthly employment levels in 2007 in twoAlaska boroughs dominated by seafood, BBB, and tourism, the DenaliB. There is almost no employment at the start of the year, a dramaticrun up for a few summer months, and then a sharp drop back down. Itis no wonder that non residents account for a large share of the jobs inthose regions.

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Impact on Stability: Part 2Impact on Stability: Part 2

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1 2 3 4 5 6 7 8 9 10 11 12

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1 2 3 4 5 6 7 8 9 10 11 12

Bethel

North Slope Borough Matsu Borough

0

5,000

10,000

15,000

20,000

25,000

1 2 3 4 5 6 7 8 9 10 11 12

In contrast here are the employment profiles for 3 regions where theeffects of the petroleum industry dominate. There is no seasonality andeconomic development can put down permanent roots.

This is true not only in the oil patch on the NSB, but also in places likeBethel, where 44% of the jobs are in state and local government,funded mostly by oil, and in the Matsu Borough, where householdconsumption dominates the economy.

Stability means more businesses can thrive locally and the share ofworkers with roots in the state is larger.

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Size Drives Economic MaturationSize Drives Economic Maturation

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

0

50

100

150

200

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300

350

400

450

0

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450

The 1/3 of all state jobs from the oil patch and petroleum revenues hasboosted the size of the economy, and this in turn has fosteredmaturation of the economy.

This graph shows the growth in Alaska employment divided into theeconomic drivers in red and all support sectors—trade, services,finance, transportation, public utilities—in green. Support employmentgrowth has dominated since statehood, bringing with it many benefits. Itmeans for example, you no longer need to go to Seattle for that haircut.It also means greater competition and economies of scale that havelowered the cost of living and the cost of doing business.

But this graph tells another important story. In a very rough way theratio of green to red represents the economic multiplier—the number ofsupport jobs added to the economy for each new basic sector job.Because petroleum has expanded the size of the economy that ratio ismuch higher today than it otherwise would have been. For example,opening a new mine today will generate more jobs than would be thecase with a smaller, and thinner, economy.

Another result of a larger Alaska with petroleum is a higher level offederal spending since some federal programs that pump money intothe economy are based on population size. So without oil we wouldalso have fewer federal $.

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Alaska Growth Since StatehoodAlaska Growth Since Statehood

230

$3

90

136

$9

99

294

$12

172

0% 25% 50% 75% 100%

PEOPLE (000)

INCOME

(BILLION $)

JOBS (000)

If we account for these spillover and maturation benefits of petroleum,then a projection of growth since statehood without petroleum might beonly 1/3 of the growth we experience, and the economy might only behalf its current size.

Of course everyone who does this thought experiment would come upwith a different result. Would the federal government have providedmore assistance, would we have worked harder to develop our otherresource industries, etc. etc. etc. The possibilities are endless and theexercise is fascinating.

However, I am convinced that the general conclusion is valid. Thespillover and maturation benefits from petroleum development havebeen real and significant, and they have transformed the economy.

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**NEW****NEW**Oil Importance IndicatorsOil Importance Indicators

100%100%State GF Operating ExpendituresState GF Operating Expenditures

66%66%Economic Growth since StatehoodEconomic Growth since Statehood

50%50%Economy Today without OilEconomy Today without Oil

33%33%Jobs Today from Oil Production & PFDJobs Today from Oil Production & PFD

So here are some new indicators of the importance of petroleum.

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Without Petroleum:Without Petroleum:TodayToday’’s Alaska Economic Bases Alaska Economic Base

0%0%TimberTimber

3%3%Air CargoAir Cargo

3%3%MiningMining

16%16%FishingFishing

20%20%TourismTourism

23%23%Federal CivilianFederal Civilian

35%35%MilitaryMilitary

And this is what the composition of economic drivers might look likewithout petroleum (as a share of jobs).

The federal government might account for nearly 58% with the twolargest private sector drivers, both highly seasonal and relatively lowincome,—tourism and fishing accounting for 36%.

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Candidates for Comparison ?Candidates for Comparison ?

OklahomaOklahoma

New MexicoNew Mexico

South DakotaSouth Dakota WyomingWyoming

MontanaMontana

IdahoIdaho FloridaFlorida

NevadaNevada

HawaiiHawaii

Is there another state that we might look like? Here are somepossibilities based on share of Native Americans, resource extraction,or tourism.

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Maine Is NotMaine Is NotLike AlaskaLike Alaska

Physically attached to Lower 48Physically attached to Lower 48

Federal land ownership 1%Federal land ownership 1%

Native American population 1%Native American population 1%

Lobsters instead of crabsLobsters instead of crabs

Unusual accentUnusual accent

Presidential hangoutPresidential hangout

I think Maine is the most likely, even though there are a number ofdifferences.

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Maine is LikeMaine is LikeAlaskaAlaska

Many mooseMany moose

Few humansFew humans

ColdCold

RemoteRemote

Independent streakIndependent streak

There are a number of similarities.

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Maine and AlaskaMaine and Alaska

Fish / Tourism / Timber / Mining / AgricultureFish / Tourism / Timber / Mining / Agriculture

Limits on sustainable harvestsLimits on sustainable harvests

Challenged by globalizationChallenged by globalization

Small and declining manufacturingSmall and declining manufacturing

Dependence on federal $$$sDependence on federal $$$s

Conflicting visions about use of resourcesConflicting visions about use of resources

““Zero Sum GameZero Sum Game”” development mentality development mentality

And a surprising number of economic similarities.

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Maine Economic History in aMaine Economic History in a

NutshellNutshell

Throughout the second half of the twentiethcentury, Maine has struggled to find a proper

balance between resource-based industrialdevelopment and environmental protection.

The state has come to rely heavily ontourism, small manufacturing enterprisesand defense-related activities andinstallations for much of its economic base.

Maine economic history has not been one to envy.

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Maine Economic Performance:Maine Economic Performance:Some EvidenceSome Evidence

Gross State Product per capita: 43Gross State Product per capita: 43rd rd ((Ak Ak 7th)7th)

Job Growth: 66% (Job Growth: 66% (Ak Ak 144%)144%)

Population Growth: 46Population Growth: 46th th ((Ak Ak 5th)5th)

Median Age: 1Median Age: 1st st ((Ak Ak 49th)49th)

Housing Built Before 1939: 31% (Housing Built Before 1939: 31% (Ak Ak 2%)2%)

Median Paycheck: 77% as high as AlaskaMedian Paycheck: 77% as high as Alaska

Projected Population Growth = 1/3 US average (Projected Population Growth = 1/3 US average (Ak Ak 30%30%above)above)

The indicators support the view that Maine’s performance has beenlacksadaisical, in spite of several advantages over Alaska, including:

The capital Augusta is only 130 miles by road from Boston.

The state is much more compact and has a more developedinfrastructure

Maine does have some economic base that we do not, including

a major ship building facility

LL Bean manufacturing

3 quality private colleges—Bates, Bowdoin, and Colby

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Typical Family ComparisonTypical Family Comparison

+$50,054+$50,054ALASKA ALASKA ““BONUSBONUS””

$128,614$128,614TotalTotal$78,560$78,560

$49,064$49,064Public SpendingPublic Spending$29,995$29,995

$6,800$6,800DividendDividend$0$0

$0$0State TaxesState Taxes-$7,077-$7,077

$72,750$72,750WagesWages$55,641$55,641

* Adjusted for lower cost of living in Maine.

In addition to describing what Alaska might look like today if petroleumhad never been discovered, we can bring it down to a personal leveland calculate the annual Alaska family of 4 bonus compared to ourneighbors in Maine (represented by their first family on the left). With ahigher average wage, no state taxes, 4 pfds, and public services valuedat nearly $50k, the annual Alaska Bonus is $50K.

Different families will have different circumstances, but clearly not onlyhas the economy benefited from petroleum, we all share in thosebenefits.

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The Economic Future of Alaska:The Economic Future of Alaska:

50 Years of Statehood Has Not50 Years of Statehood Has Not

Changed the ChallengesChanged the Challenges

Oil Oil $19 $19 78%78%

Mining Mining $ 2.5 $ 2.5 10%10%

Seafood $ 1.4Seafood $ 1.4 6%6%

Timber $ .1Timber $ .1

Tourism Tourism $ 1.5 $ 1.5 6%6%

Average values 04-09 in 2008$.

Although not like Maine, we still face many of the same economicchallenges we faced at statehood. The modest market value of ourseal industries demonstrates they cannot alone carry the economy atthe level we have attained and come to expect. Petroleum is still acritical element of our economic future.

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Petroleum Resources for aPetroleum Resources for a

Sustainable Economic FutureSustainable Economic Future

(Billion Barrels of Oil)(Billion Barrels of Oil)Production History:

North Slope 15.4 Cook Inlet 1.3

Reserves Today: Central North Slope 5.9 Cook Inlet .1

Potential Additional Reserves (Technically Recoverable—USGS, MMS):

ANWR 10.4NPRA 10.6OCS 23Central North Slope 4

Fortunately petroleum has not only been transformative, and asustainable industry for more than a generation, it has the potential tohelp sustain the economy for generations to come. No one knows howmuch petroleum remains to be found and produced, but this tabledemonstrates that potential.

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The Alaska Economy WithoutThe Alaska Economy WithoutPetroleum?Petroleum?

Realizing that potential requires that we understand the role ofpetroleum in the economy. Although the movie of Alaska economicgrowth would not run exactly in reverse if petroleum were to disappearas one of the legs of our stool, it would have serious negativeconsequences for the other two legs. Making sure that is not oureconomic future will be a challenge for us all.

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How Oil Has TransformedHow Oil Has Transformed

the Alaska Economy the Alaska Economy

byby

Scott GoldsmithScott Goldsmith

Institute of Social and Economic ResearchInstitute of Social and Economic ResearchUniversity of Alaska AnchorageUniversity of Alaska Anchorage

ANCHORAGE CHAMBER OF COMMERCEANCHORAGE CHAMBER OF COMMERCE

““MAKE IT MONDAYMAKE IT MONDAY””

July 6, 2009July 6, 2009

Anchorage, AlaskaAnchorage, Alaska