Maintaining Oil Wealth for the Long Run: MaximumSustainable Yield
Research Matters No. 64. Maintaining Oil Wealth for the Long Run: Maximum Sustainable Yield
August 13, 2012
Alaska’s state government is sitting pretty right now, with oil revenues at record levels, $60 billion in savings, and maybe another $100 billion worth of petroleum in the ground. Still, a new paper by Scott Goldsmith, professor emeritus of economics at ISER, finds that trouble is looming—but it also describes a way for the state to maintain its oil wealth for the long run.
The paper summarizes the problem: oil production is dropping, and state General Fund spending is climbing 8% a year. Soon, a combination of smaller oil revenues and higher spending will leave a gap in the budget. If the state lets the budget keep growing at the current pace and covers the shortfall with savings, the easily available savings will be gone by 2023 and the deficit could reach $7 billion a year.
The analysis identifies another way the state could go: managing its remaining petroleum wealth for maximum sustainable yield—that is, set spending from petroleum wealth at a level that could be sustained indefinitely. Today, with the state's estimated petroleum wealth of $160 billion, sustainable spending from that wealth would be about $6.4 billion a year.
But the paper also notes that calculating sustainable spending will always be a moving target, and that at any time there will be reasonable differences of opinion about the current value of the state's petroleum wealth. If the state did begin managing its wealth for maximum sustainable yield, it would need to update the estimate as new information became available.
Read the full analysis (PDF, 512.7KB).