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Alaska Needs a Plan

It needs it now

We were fine before oil and we’ll be just fine again without oil.”

Every time I hear that statement, I shake my head. I was born and raised in Alaska before there was oil. It’s easy to romanticize about what it was like then.

I grew up running through the sprinkler in our yard, seeing how many sisters I could convince to cram themselves into a parrot cage (and then locking it…), or loading into Pop’s “Weasel” (track vehicle) to ride down to the Westchester swamp – catching sticklebacks and tadpoles in the summer and playing “Crack the Whip” on flying saucers in the winter. Pop was like the Pied Piper of the neighborhood. Kids ran out of their houses, pulling on jackets as they clambered onto the “Weasel” when he drove past.

Not only was there no Internet, video games or cell phones, there was no TV yet in Alaska. We learned early how to entertain ourselves. In the summer, the neighborhood challenge was to see how many bees you could catch in a jar at the same time, without getting stung. I’m proud to have held the record for the neighborhood, and don’t remember ever getting stung.

I loved animals and was mad about horses. While other girls were reading Nancy Drew, I was reading every Black Stallion book in the series. Pop thought a horse was too expensive to maintain in Alaska, so I never had one. But one morning I woke to discover a burro tethered to my bedroom window!

 

Romance vs. Reality?

Like I said, it’s easy to romanticize that time in Alaska, before oil. But life was hard.

Our economy was pretty simple – small, thin and seasonal. Total employment, averaged over the year, was about 90,000 jobs. There were few Alaska businesses providing services to our natural resource-producing industries or to households. Alaskans were poor, relatively speaking – the average household income was 10 percent to 20 percent below the U.S. average, all while the cost of living was significantly higher than the rest of the country. Fishing and construction associated with federal spending meant there were lots of private jobs in the summer, but the economy virtually shut down when winter arrived. Half the number of people worked in the winter as in the summer. I used to think of it as the lights going out for the winter – which they often did, literally, in those days.

A change in the dollars circulating in Alaska had an overly dramatic effect. Incremental amounts of money injected into or taken out of such a small economy had an immediate and powerful impact. The times were truly “boom or bust.”

The State had little money to spend on social services, infrastructure or education. We paid income tax and there were no Permanent Fund Dividends. Most social service support was furnished by volunteers.

There was no tourism industry to speak of, little or no electricity or running water in rural Alaska and, due to economies of scale, food and building materials shipped up north were very expensive. Most everything came from the “States.”

 

A Big Change

Our economy has changed since then, to say the least. Economic growth since statehood has been sensational when measured by raw numbers – jobs, personal income and population. Employment has increased by more than 300 percent from 90,000 to 380,000 jobs. Income, in constant dollars, has increased even more rapidly, from
$3 billion to $28 billion, and population has tripled.

What accounts for all this growth? Federal spending plays an important role, of course, contributing to about one-third of those 380,000 jobs. Natural resource extraction industries, such as mining, seafood, agriculture and timber, along with the tourism and air cargo industry, make up another third. Those are two legs of Alaska’s economic three-legged stool.

So what’s the third leg of the stool? It’s no surprise to anyone who’s lived here for any length of time that the petroleum industry is a major economic driver in our state, and the critical third leg to our economic stool

Barely a decade after statehood, with the discovery of the Prudhoe Bay oil field in 1968, and the next year, when the North Slope lease sale brought in nearly a billion dollars (and remember, this was when a billion was real money) the state’s economic future – and my life, personally – was changed forever.

 

School Life, Change for Better

I was working in the bank that summer of ’69 and heading off to Duke University as a junior transfer student in the fall, accepted as an Interior Design major.

I remember looking out the window from my desk at Fourth Avenue as the lease sale began. It had been a bright sunny morning. High clouds came in as the sale started and the sunlight dimmed. No one was out on the street – they were all inside, listening to the lease sale on the radio. It felt like a scene out of the old black and white Twilight Zone TV show.

First National assisted with the lease sale, along with its correspondent banking partner, Bank of America. At that time, the physical check needed to be presented for deposit. With the size of that Prudhoe Bay check, we determined, by hiring a private plane and flying the check overnight to the Bank of America office in New York City for deposit, the State of Alaska could get an extra day’s interest and more than pay for the cost of the plane.

 

Benefitting Alaska

I was fortunate to be able to ride that plane back East with the Prudhoe Bay check. I was overwhelmed by this historic discovery and how it could so dramatically impact so many Alaskans and the financial well-being of our Great Land. It made clear to me at a very fundamental level that economics isn’t just about numbers.

When the jet landed in New York City, I boarded a flight to Durham, North Carolina, walked into the Admissions Office at Duke and promptly changed my major to Economics. I’ve never looked back.

That lease sale permanently imprinted on me how changes in
economics and the economy can radically change the future of a state and its people.

At the time of the sale, the economy only supported 37,786 wage and salary jobs in Anchorage – 86,565 in the entire state of Alaska. Soon our lives changed dramatically. We had year-round jobs and money in our pockets – not just oil field and construction jobs, but also service and support business jobs. People flocked to Alaska and the increased demand from a rapidly growing population caused real estate prices to skyrocket.

The “Dollar Flow into Alaska” chart accompanying this article shows graphically how dramatically the economy changed when oil began flowing through the trans-Alaska oil pipeline. The foundation of any economy is the money it brings in by providing something the world wants to buy. For most states that means manufacturing something; for Alaska it means natural resources, mostly petroleum. Over the course of a few years, massive amounts of dollars flooded into our economy thanks to the oil flowing down the line.

 

General Fund Oil-Driven

Today the petroleum industry funds a full 85 percent to 90 percent of the State of Alaska’s General Fund. That money funds myriad State services, many vital to our quality of life. State of Alaska money from oil royalties also funds tax credit programs that help encourage economic diversification via industries like tourism and film-making. Even more jaw-dropping – one out of every three jobs held by an Alaskan can be traced directly to the petroleum industry. Those two kinds of spending create jobs in every corner of Alaska.

The ride up on the wave of a growing economy was a rush. The “high tide” raised almost everyone’s “boat.” It’s the ride back down the backwash of a slowing economy – without a plan to fill the pipeline – that has me very worried.

We won’t be “fine” if oil, the third leg of Alaska’s economic stool, is kicked out from under us.

We won’t be “fine” as the Alaska economy painfully adjusts to greater unemployment, fewer jobs and falling real estate values, as supply exceeds demand when people leave Alaska in search of jobs elsewhere.

We won’t be “fine” when social service agencies – the safety net for many Alaskans – must close their doors in a time of fewer state grants and reduced donations.

We won’t be “fine” as the state returns to a seasonal economy with fewer year-round jobs, reinstates an income tax, and discontinues paying out Permanent Fund Dividends.

People accuse me of fear mongering. But I’m not. It’s basic economics, and I’m worried about an Alaska that doesn’t have a plan to fill the pipeline.

With royalties from the pipeline funding almost 90 percent of Alaska’s General Fund, there is not enough time to diversify our economy in a way that will replace the huge income stream that oil in the pipeline provides to our state. When it’s gone, what will State government do for money?

The oil industry generates one-third of the jobs in Alaska. With the loss of those jobs, there will be an oversupply of houses, as people put their homes up for sale and head “South,” looking for jobs. Real estate values will crash.

Were you here in the 1980s when that happened? I sure was. And it was ugly. Alaska lost 20,000 jobs, nearly 10 percent of all jobs. Real estate values dropped between 20 and 50 percent. People would literally walk into the bank and throw the keys to their homes at us and then get in their cars to drive “South.” It took more than a decade for housing prices to recover. It was a heart- and gut-wrenching time for those of us who love Alaska. We can avoid a reoccurrence of that awful scenario with a plan to fill the pipeline.

The pipeline is currently less than one-third full and the volume of oil flow is declining at a rate of 6 percent a year. The experts say it will have to be shut down before it’s completely empty. And when the pipeline is shut down, the law requires it be dismantled – mothballing pending future development isn’t permitted.

It takes seven to 10 years from discovery before the first drop of oil makes its way down the pipeline. None of the three major oil producers – BP, Conoco-
Phillips or Exxon – are exploring this year. With virtually maintenance of existing lines only being performed today on the North Slope and no exploratory wells being drilled, Alaska is already behind the curve in terms of filling the pipeline.

 

Alaska needs a plan to fill the pipeline and it needs it now. We won’t be “fine” without a healthy oil industry in Alaska.   

This article first appeared in the August 2011 print edition of Alaska Business Monthly magazine.

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