End in Sight for Alaska’s Oil-Based Economy?

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Against a grim backdrop, Alaska has one large Ace left in the hole.

By Michael McDonald, Oilprice.com:

Alaska has long been one of the few U.S. states without an income tax. Thanks to its incredible bounty of natural resources, the state had more than enough cash coming in through oil company taxes and especially Prudhoe Bay production. All of that is starting to change. After a 40 year oil boom that transformed Alaska from a frozen tundra into one of the richest states in the country, the oil price crash is bringing reality back to bear.

Alaska’s problems go deeper than the current oil price collapse though. Simply put, the state is getting long in the tooth – at least as far as its productive assets go. The Prudhoe Bay Oil field, once the largest such field in North America, is starting to reach the end of its life. In 1985, the Prudhoe Bay field was pumping 2 million barrels per day – roughly a quarter of the total U.S. output. Today it is pumping 500,000 barrels a day. That’s leaving the 800 mile Trans-Alaska pipeline seriously under-utilized.

Roughly 90 percent of Alaska’s general fund revenues are tied to oil. Between the oil price collapse and the inexorable decline of oil production over time, Alaska now faces a $4-billion budget deficit, all while the state has slid into an oil related recession over the last year. With the State’s rainy day fund burning through $11 million per day, that energy fund will be exhausted in less than two years.

All of this is a new challenge for Alaska and its roughly three-quarters of a million residents. Alaska has traditionally lightly yoked its residents with the lowest tax burden of any state across the country. In contrast, it has also had the highest per capita spending in the country thanks to its vast swath of territory. Both facets of this social compact may have to change. The State and its new governor, Bill Walker are already looking closely at implementing a state income tax for the first time in 35 years. Walker is also looking to double the gas tax and cut corporate incentives for energy firms.

Against this grim backdrop, Alaska does have one very large Ace left in the hole – the $53-billion Alaska Permanent Fund. This fund, composed of past oil earnings for the state, is contractually untouchable by politicians. Or at least the principle is.

The earnings from the fund have traditionally been paid out to Alaskan residents as a bonus for living in the state. Last year, every man, woman, and child in the state got a check for $2,072. That may change in the future as Walker is looking to take those earnings to help fund the state government.

Regardless of the political decisions made in Alaska, it’s clear that changes will need to be made going forward. Alaska is not alone in this situation. Traditional heavy weight producers like Norway and the Saudis have similar issues.

The key to ensuring a prosperous future in all three cases is the same – investing the proceeds of the natural resource bounty when times are fat and revenues flow freely. Alaska needs to invest the proceeds of its past bounty while it still can to ensure a bright future for a time when oil revenues will no longer sustain the state on their own. By Michael McDonald, Oilprice.com

What’s next for “king coal” and bankrupt coal miners? Read…  Why US Coal Production Collapsed to Lowest Level since 1981

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  33 comments for “End in Sight for Alaska’s Oil-Based Economy?

  1. OutLookingIn
    June 20, 2016 at 6:21 pm

    The decline of Alaska’s north slope oil productivity is just the tip of the problem, which is global in scope.

    Energy Returned On Energy Invested – EROI

    The global average EROI may decline to just 11:1 by 2020, at which point energy will be 50%+ more expensive (in real terms) than it is today. At the moment, the glut of oil on the market in conjunction with the global economic free-fall, foretells an oil price that barely covers cost of production.

    When the current oil supply overhang has been worked through, (possibly years) the future EROI cost will push energy prices to record highs. At which time we can only hope that a different paradigm arrives to replace the current broken model.

    • illumined
      June 20, 2016 at 7:35 pm

      Here we go again, more peak oil claptrap. Scientific theories make testable predictions, peak oil theory has been making predictions since the 1880’s about the imminent end of oil, only to be wrong over and over and over again. This isn’t so much a science as a cult.


      • OutLookingIn
        June 21, 2016 at 2:36 am

        I would seriously consider expanding your source material before pronouncing peak oil as bunk. Read Dr. Hubbard’s excellent work in this field as a start.

      • night-train
        June 21, 2016 at 2:45 am

        We can deliver oil for quite a while longer, if price is no object. The catch is that it will be really expensive. Deeper and deeper offshore prospects and unconventional oil prospects will require an ever increasing price, if you are interested in producer profitability.

        There is also room to increase recoverable reserves in existing reservoirs with technological advances. Of course, these tech advances also require a higher price to make them economical.

      • Kasadour
        June 21, 2016 at 9:37 am

        With layers upon layers of production (and resource) added to the final product, the peak oil narrative is exactly on track. The temporary price collapse is also inidicitive of the end the cheap oil age due to the massive debt associated with production which lead to demand destruction. Furthermore, what good is oil as an energy source if it costs more to extract than the net energy it provides? If I were you I would do a little more research on the subject before proclaiming peak oil a myth.

        • illumined
          June 21, 2016 at 10:49 am

          I used to be a peak oiler, back when the oil price peaked at nearly $150 a barrel. I’m quite familiar with all the predictions, and at the time Simmons, Campbell, etc were all calling peak oil, they were proclaiming an ever rising price of oil, that this was it, the end, doom, etc……………….only one problem: none of it was true. Here’s another source for you, one of the peak oil “experts” themselves, proclaiming the price “might go way higher”. https://www.youtube.com/watch?v=rkzETN8qfzw

          In the real world in addition to above average global growth caused by the emerging market bubbles, which greatly increased demand in a short period of time, there’s also the fact that commodities markets have been heavily manipulated by investment banks and reading Zero Hedge articles about the enormous amounts of onshore and offshore storage of oil makes it clear what’s going on.


          Furthermore every few decades we go through something called a “commodity supercycle”, and every time we go through one like in the 60’s and 70’s the Malthusians come out of the woodwork proclaiming imminent doom from peak oil, copper, etc. Here’s one such example, in the 1976 presidential debate Jimmy Carter said we’d be out of oil in 35 years, meaning by 2011. It’s now 2016, it didn’t happen. https://www.youtube.com/watch?v=iXHTmEUGR7c

        • Kasadour
          June 22, 2016 at 11:29 am


          There is no reason to believe oil is subject to genuine price discovery at this point, since the FED has its dirty little hands in the oil markets just like it does the bond markets and assets. The crash in oil prices (aka demand) demonstrate clearly the fact that economies can’t operate on expensive ($100+) oil price. other posters here pointed out correctly that oil companies are scraping the bottom of the barrel for usable oil. It’s not even good quality sweet crude. Bitumin, fracking, off-shore, seawater elevation technique- all these demonstrate the reality of the oil industry’s predicament. The fact that they are unable to make adjustments in production to stabilize free market price (so the FED has to do it behind the scenes, tinkering with the markets) also demonstrates their predicament. But the FED is flying without hydrolics, so to speak. We will see how this plays out. Time will tell.

    • Paulo
      June 21, 2016 at 9:36 am

      Outlooking in nailed it. Forbes is a hack source and only serves to sway investment.

      Ilummined might want to talk to a guy I know who lives up the hill from me. He believes tthat the earth is filled with Petroleum, like a noughat centre, and that when God (or Forbes) sees taht we need more, He will guide mankind to more discoveries.

      Of course this fellow was also raised in a cult. :-)

      In a few years thr Alaska Pipeline will not be able to even flow due to lower volumes.


      • Paulo
        June 21, 2016 at 9:38 am

        Excuse the typos. I am busy trying to shovel in breakfast, drink coffee, type, and not be pissed off. Have to leave in a couple. The eyes auto-correct…the computer didn’t.

      • Kasadour
        June 21, 2016 at 10:41 am

        I know a guy that claims oil isn’t a fossil byproduct at all. That it replenishes on its own by some abiotic process. I heard a story on CNBC that an Indian company wants to mine energy products and rare metals on the moon. Serious story.

        • Thomas Malthus
          June 21, 2016 at 11:21 pm

          If it was on CNBC then it MUST be true!

          If it was also on Bloomberg then it is DEFINITELY true!

          sarc sarc sarc

          Quick question — if oil is a perpetual energy machine…. then why are we scraping the bottom of old wells with a process called fracking?

          Perhaps you can pass that question on to the clowns at CNBs for comment….

  2. Petunia
    June 20, 2016 at 6:48 pm

    China wants to build a train from China through the Bering Strait into Alaska and then into California. Now may be a good time to consider it. It would be an awesome trip and great tourist attraction.

    • June 20, 2016 at 7:34 pm

      China wants to build a high-speed train in California – and that deal just fell apart.

  3. illumined
    June 20, 2016 at 7:07 pm

    Norway already taxes it’s people to such a ludicrous degree I don’t see how they could squeeze any more out of them. While there is more to Norway’s economy than oil, I think people tend to underestimate how massively pervasive oil money is a such a small economy, and what the consequences of running out of it will be.

    • June 20, 2016 at 7:32 pm

      In my experience, Norway is the most expensive place on earth to have a beer. Alcohol taxes make you feel like a terrible and miserable sinner (or sacrificial lamb).

      • Kasadour
        June 21, 2016 at 10:22 am

        I would brew my own. That’s what we do in Portland Oregon. Everyone makes their own beer and alcoholic kombucha. I accidentally made mine a little too strong one time. Blackberry wine is also easy to make and it’s not too bad.

      • Jacob
        June 21, 2016 at 9:54 pm

        It’s not taxes, it’s Norway itself. Norwegians are comparatively rich, they just have to get themselves abroad to be able to make the comparison. Go to Norway and then rent a car and drive to the Swedish border: Well before you reach the border you’ll start to see big boards advertising shopping malls in Sweden. Not close to big population-centres in Sweden – quite to opposite. These shopping centres are essentially border-shops. Quite like the German border-shops except these are for more than just alcohol. Thousands of Swedes are employed in retail existing only for targeting Norwegian shoppers.

        Norwegian taxes are no higher than their Nordic neighbours, quite the opposite. Buying a take-away pizza in Norway will still cost you about three times as much as the same would cost in Sweden.

        As for alcohol: It’s the circle of life (-blood of economy) really. Norwegians go to Sweden to buy alcohol, Swedes go to Denmark (or Finland if so located), Danes go to Germany. Except for more often in recent years, Swedes by-pass Denmark and go directly to Germany to buy their booze.

        In my book it is quite insane. Spend an entire day (from dawn til dusk) to save maybe a regular working days income? Insane. Unless, of course, if do in a more entrepreneurial way. Say, being on disability pension and going to Germany once a week carrying home thousands of beer and hundreds of bottles of booze which you then spend the rest of your disabled week selling to a network of customers.

      • Thomas Malthus
        June 21, 2016 at 11:25 pm

        Stopped at the water front in St Tropez a couple of years ago for a beer with the wife…. and to watch the Wonderful People sit on their ultra yachts like so many Paris Hiltons yearning for adulation…

        The bill for 3 beer: USD54.

        • June 22, 2016 at 12:14 am

          OK, you win. Most expensive beer. I hope it was something special, not just the plain old Kronenburg.

    • Nicko
      June 20, 2016 at 7:32 pm

      Good thing they have the largest sovereign wealth fund on the planet, about $900 billion. No matter what happens, they’ll have several decades to figure it out.

      I have a few friends who live in Norway, and they do pay well over 50% taxes….but they get so much in return.

        June 20, 2016 at 7:41 pm

        LET’S SEE, the home of vidkun quisling. and trygve lie.

        what is there to norway?

      • illumined
        June 20, 2016 at 7:53 pm

        Sovereign wealth funds can disappear very quickly in a country with such a high living standard, especially since they’ll need a lot of money to bailout their banks when their housing bubble bursts (for reference to that:http://www.businessinsider.com/norway-and-sweden-bubble-may-not-be-sustainable-2015-10).

        They also have other problems in that their wealth fund is really an investment fund, and in the context of a global asset and bond bubble most things they are invested in no doubt are exposed to it to some degree or another. Last January they drewdown nearly $800 million from the fund, we’ll see a lot more than in the next few years.

        And in my experience the people very rarely get a lot out of government being so big. Maybe Norway is an exception but as Sweden has demonstrated there’s usually more to the story.

      • Marl
        June 21, 2016 at 2:26 am

        thats because Trillions are not quietly siphoned away by their very small Military Industrial Complex

        unlike here…

      • Thomas Malthus
        June 21, 2016 at 11:27 pm

        When the global economy collapses… they will have nothing

  4. Jim
    June 20, 2016 at 10:00 pm

    Better a Soverign Wealth Fund than the US sovereign debt fund. Norway’s fund is structured as a pension fund for benefit of citizens. $800mm for 5mm people. By comparison CalPers has $300mm for 1.2 million beneficiaries.

    • June 20, 2016 at 10:48 pm

      I agree, Jim. Just a couple of typos or clarifications…

      CalPERS asset value totaled $300 BILLION, not “mm” (= million). There are even more beneficiaries: 1.8 million (active and retirees), but I agree, not exactly ideal. And many of them get to retire at a fairly young age…

      The Norwegian fund has a market value of NOK7.2 TRILLION, or $868 Billion (not “mm”).

  5. sinbad
    June 20, 2016 at 10:13 pm

    The old money pits(oil basins) are running out, and new money pits are coming to the for. The US has controlled many of those money pits for a long time, the French, Dutch and British have been in the game for even longer.

    Now that the fields are running out, it isn’t just Alaska, Saudi Arabia is also in decline. The new cheap fields are in central Asia.
    He who controls the oil, controls the world.

  6. Paulo
    June 21, 2016 at 9:49 am

    You often read little blurbs about awesome new/big oil fields dicovered, or spectacular new additions to reserves. Then, you do the math and realize the awesome new discovery in ‘stan, or the North Sea declining field, (that might come on the market in the next 10 years), is actually a whole 8 day world supply or maybe 10 days worth of burning power.

    We are currently burning/using petroleum at a rate of 10X current discoveries. And at $48.00/bbl (today’s price), no Majors are out looking for more. That is Ther Problem. And when shortages do once again appear, (if the economy ever needs it), the easy cheap stuff was already burned up on Sunday drives and idiotic commutes. Sure, $50 oil prompts Shale Players to talk about drilling again, or at least in the two sweet spots left, but any money earned will be used to service debt and keep them breathing. The age of oil is gasping like a beached catfish.

    • Kasadour
      June 21, 2016 at 11:08 am

      You’re right. Exxon recently pulled out of the Arctic all together and they aren’t investing anything in discovery anywhere. And the big tight oil play that was supposed generate gazillions for the California state budget fizzled out and ended up costing money after it was all said and done. I guess it turned out u can’t frack on a fault line or something.

    • June 21, 2016 at 11:47 am

      In California, we had the miracle Monterey shale.

      In 2011, the industry, and the EIA, estimated it to contain a recoverable 15.4 billion barrels of oil. That’s HUGE. The oil may well be there, but due to the earthquake-prone geology, the layers of rocks are wavy and broken up, and the oil cannot be recovered with today’s technologies. So in 2014, the EIA cut its estimates by 96%. Poof gone. That’s how it goes with hype.

      Oxy was the main driver behind all the hype. It then spun off its California division (California Resources), which was good for hedge funds and Oxy, but for stockholders and bondholders of California Resources, it was a fiasco.


      • Thomas Malthus
        June 21, 2016 at 11:35 pm

        Wolf – there is a lot of oil under the ground… nobody is disputing that

        The issue is one of cost — it is too expensive.

        The global economy cannot function if oil sells at the break even point.

        • Kasadour
          June 22, 2016 at 7:58 am

          You’re right. And if it sells above around $80 (around the break even point give or take) to $90 and up, it crushes economies and we then have demand destruction and price collapse. This is exactly what happened. Problem now is none of the major oil drillers (Saudis, Iranians, etc) can stop pumping (which is why OPEC cannot come to a deal to curtail production). They are on a treadmill that is constantly speeding up. In other words, they are all in the same sinking boat. I expect another round of demand destruction (price collapse) before it goes to the moon!!!

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