The foundation of Alaska’s Economy has not changed, even though economic circumstances world-wide have changed dramatically. The striking change in commodity prices worldwide has left state government with less money to spend, but it has not changed the competitive advantages that drive Alaska’s economy.
The foundation of any economy, big or small, is capital investment—money spent to make money. Investment capital flows to competitive advantage. The competitive advantages that Alaska enjoys have not changed, except maybe for the better.
Alaska’s principal competitive advantage is an abundance of certain natural resources. Oil is by far the most abundant natural resource found in Alaska and the most valuable. But natural gas, minerals, fish, timber, and incomparable natural scenery are also in abundant supply in comparison to other places in the world. Geographic location offers the other competitive advantage. Proximity to Asia lowers the cost of delivering natural resources extracted in Alaska to Asian countries that are the largest market for those natural resources. Geographic location also brings to Alaska an enormous amount of federal spending for national defense. Alaska’s geographic location may prove increasingly valuable as the Arctic passage is developed as a second major route for surface transportation of commodities and products.
Investment for oil exploration and development is being curtailed, but it hasn’t stopped. Major finds and development projects were announced earlier in the year, and the companies involved are going forward. Through mid-September of this year, average daily oil production was up about five thousand barrels a day and projected to exceed the average daily production level on an annual basis forecast by the Alaska Department of Revenue. Investment will be curtailed as long as the price of oil remains low; as long as governments, both state and federal, make it more expensive to get the oil out of the ground; and as long as state government insists on taking a larger share of the profits from its sale.
Abundant natural gas deposits remain and are not stranded as some portray it. North Slope gas is being injected into the ground to maximize oil production and by regulation cannot be harvested and sold off until perhaps 2025, under any circumstances. So, the fact that the major oil producers have left the commercialization of that gas to the State of Alaska is not negatively impacting the economy at present. New discoveries and recovery techniques in Cook Inlet assure lower energy costs for the largest portion of Alaska’s population and economic sector. Alaska Gasline Development Corporation, the State sponsored gas pipeline development company, continues to spend the money appropriated for gas line development planning, and the new executive officer of the company, together with the governor, are expressing confidence that other pipeline investors will be found.
Enormous levels of national defense spending in Alaska continue to bolster the economy. Threatened base closures were avoided, and substantial new appropriations were authorized for new systems and facilities to accommodate the F35 fighters coming to Alaska and further development of the missile defense system installed in Alaska.
Tourism results this season were strong and by last report resumed pre-recession levels for travel to Alaska by cruise ship when the 1 millionth cruise ship visitor arrived in Alaska.
Commercial fishing results were mixed this year, as the total catch was greater than in recent years, but sales prices were down as stocks from previous years remained to be sold in the largest markets for Alaska seafood.
On the construction front, residential construction starts have been in steady decline, but the level of government spending for capital projects remained at similar annual levels as projects commissioned before the price of oil declined were completed.
So, from an employment standpoint, overall the effects of the precipitous decline in oil prices have yet to be felt. According to the Alaska Department of Labor, seasonally adjusted August employment levels compared favorably to the same month last year. Declines in employment in the higher-paying petroleum and construction industries were somewhat offset in pure numbers by growth in the healthcare, manufacturing, and leisure/hospitality segments of the economy.
All of this goes to show that the foundation of a healthy economy still exists in Alaska—just not one that can sustain the state spending that followed dramatically increased oil prices. Alaska has been down this road before, more than once, and has come back with a stronger recovery each time because the foundation of Alaska’s economy remained unchanged. In fact, it appears that Alaska is better positioned to weather the current decline in commodity prices brought on by the reduced demand for those same commodities. But further change is needed.
Right now in the banking industry we are seeing a decline in loan demand at the same time we are experiencing a steady increase in deposits. We attribute the decline in loan demand to uncertainty in the private sector that state government can do what is necessary to reduce government spending, make use of other sources of revenue to balance the state budget, and avoid taxing the oil and gas industry to the point where further investment in oil and gas exploration and development stops. On the other hand, we attribute the increase in deposits to the same uncertainty in the private sector. Private enterprise and its constituents are maintaining liquidity and increasing savings so they have reserves to fall back on if state government fails to do what is necessary to sustain economic prosperity in Alaska or so they have the resources to act quickly and promptly to take advantage of economic opportunities that will become available when the pale of state government inaction (or worse) is removed.
Together with my fellow employees at First National Bank Alaska, we believe there is real prospect that the people of Alaska can bring about a change in government savings and spending that was not present the last time we saw a precipitous decline in commodity prices and, particularly, in oil prices world-wide. So too we see a real change in the reaction of the private sector in regard to savings and spending. The last time, notwithstanding a precipitous decline in commodity prices and a contemporaneous unwarranted increase in asset prices, borrowing continued unabated and savings, if any, added to spending to buy assets at unsustainable prices. In short, we believe Alaskans have learned from past adverse economic events—WE BELIEVE IN ALASKA.
Betsy Lawer is Chair and President of First National Bank Alaska.
This article first appeared in the November 2016 print edition of Alaska Business Monthly.