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Hitting Bottom to Reach the Top

Dec 24, 2018Featured, Finance, Magazine, Oil & Gas

Isaac Stone Simonelli

Cautious optimism surrounds forecasts for Alaska’s economy in 2019 as many predict the state’s recession will finally bottom out—making Alaska one of the last energy-dependent states to begin recovery since oil prices tumbled about three years ago.

Could 2019 mark Alaska’s economic turnaround?

Economists and business leaders take into consideration a number of factors when assessing economic health including unemployment rates, workforce demands in specific fields, the potential for the Alaska Legislature to approve a strong capital budget, and whether companies are signaling they might be ready to make major investments.

“I think that many are hoping for a recovery in 2019, but a lot of the thinking has been based on the idea that the Alaska Legislature—no longer facing immediate election—will be able to come to an agreement with respect to a long-term solution for funding state government. In addition, the higher oil prices through the end of October have been adding to predictions of a recovery,” says Marcus Hartley, president and principal economist for Northern Economics. “The percent drop in oil prices since the beginning of November may dampen some optimism.”

He continues, “If a capital budget is approved with meaningful amounts of funding, the construction and professional services sectors that have been really feeling the pinch from the lack of state government funding are likely to begin to start hiring more employees.”

Mouhcine Guettabi, an associate professor of economics at the Institute of Social and Economic Research, agrees that at least some of the expected economic turnaround is dependent upon legislative choices.

“The capital budget has been bare-bones for four years, which has affected the construction industry and, of course, has meant deferring maintenance and investing in infrastructure,” Guettabi says. “A healthy capital budget is certainly good for the future of the state and will be a catalyst in stabilizing the state’s economic condition. Construction as of June 2018 is only 86 percent of what it was in June 2014.”

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Between 2014 and 2017 the construction sector lost 2,178 jobs, roughly 13 percent its workforce. Even with many industry insiders expressing optimism about the economy in the coming years, employment in this sector is expected to grow at a slightly slower pace than the rest of the economy, adding about 700 jobs by 2026, according to the October Alaska Economic Trends released by the Alaska Department of Labor and Workforce Development.

“We have had more than thirty straight months of job losses dating back to October 2015. The rate of job loss has, however, slowed. I anticipate that the recession [job losses] will end in the next six to eight months. A recovery is an entirely different question as we have lost between 12,500 and 13,000 jobs, and I do not anticipate that we will recover them for quite some time,” Guettabi says.

“I anticipate that the recession [job losses] will end in the next six to eight months. A recovery is an entirely different question as we have lost between 12,500 and 13,000 jobs, and I do not anticipate that we will recover them for quite some time.”

—Mouhcine Guettabi, Associate Professor of Economics, ISER

Guettabi uses a large-scale econometric model that relies on historical relationships to make predictions. However, more than 80,000 employees work in government—federal, state, and local—which means that a sizeable portion of employment is dependent on legislative decisions that can be difficult to predict. Additionally, basic sectors (such as fishing) are dependent on world markets, rendering them difficult to forecast.

Nonetheless, Paul Martz, an economist with the Department of Labor and Workforce Development, also sees positive signs in the economy.

“Although the state remains in a protracted recession with job losses continuing in 2018, we project Alaska will add roughly 17,000 jobs from 2016 to 2026, for 5.1 percent growth. Oil prices have rebounded since the plunge that began in late 2014, but the recession’s lingering effects will dampen some industries’ growth over the decade,” Martz writes in the October Alaska Economic Trends.

Martz notes that the state is “set to slowly climb out of the recession” with projected growth averaging about 1,700 jobs per year, with the healthcare industry creating the most jobs. Healthcare is expected to add 10,134 jobs by 2026, and the next closest industry is hospitality and food services which is anticipated to add 2,782 jobs.

Though mining, which in this instance includes oil and gas, is only expected to add 112 jobs by 2026, oil and gas companies are signaling large investments in the state, making them a significant source of optimism for economists looking at what 2019 holds.

“You don’t bank on price; the oil industry doesn’t bank on price in their planning. When we look at what’s going on, we look at the committed announcements in investment by the companies and what does that mean in the aggregate,” says Bill Popp, president and CEO of the Anchorage Economic Development Corporation.

“We’ve got ConocoPhillips making significant announcements, as well as Brooks Range Petroleum, Oil Search, and Hilcorp. BP has just talked about getting to engage with some new seismic within the Greater Prudhoe Bay unit and some other investment that they are considering. Those are some positive signs,” he says.

A report released in 2018 from IHS Markit, a London-based global information provider, says that the North Slope is poised to re-emerge as a major source of US energy production.

“We expect development in the basin to continue to be driven by commercial masters ConocoPhillips and ExxonMobil [as well as] challengers Oil Search and Hilcorp,” says Kareemah Mohamed, associate director of plays and basins research at IHS Markit. “We anticipate increased bidding activity and farm-ins as established operators expand their presence and new entrants seek to gain early mover advantage by leveraging low acreage prices to enter newly opened areas.”

Not including oil from the Arctic National Wildlife Refuge, North Slope oil output could increase 40 percent over eight years, IHS Markit reports.

“As Alaska climbs out of only the third recession in the state’s history, oil and gas can continue to play a role in a strong economy. When the oil and gas industry is strong and investing, it has a direct and indirect impact on the economy,” says Alaska Oil & Gas Association President and CEO Kara Moriarty. “Over one-third of all jobs and one-third of all wages are attributed to the industry. No other industry sector comes close to that type of economic multiplier.” However, Steve Colt, professor of economics at Alaska Pacific University, is less optimistic about the state of the economy.

“As Alaska climbs out of only the third recession in the state’s history, oil and gas can continue to play a role in a strong economy. When the oil and gas industry is strong and investing, it has a direct and indirect impact on the economy.”

—Kara Moriarty, President and CEO, AOGA

“I am skeptical because the current economy was built on high-priced oil and unsustainable state spending. The economy probably needs to be smaller to be sustainable. By 2019 previous capital budget appropriations will be largely spent,” Colt says, noting that Governor Mike Dunleavy’s proposal for deep cuts to the state budget in an effort to balance the budget would stop any recovery before it gets going. “It is more likely that the legislature will rely on dwindling savings one final time.”

Though oil and gas investment is expected to play a large role in keeping the economy from falling any further, legislative choices will continue to play a significant role in a potential recovery.

“And government is an important part of business decision making in terms of willingness to invest… there are certain services a business needs and there needs to be an indication that those services are going to be in place,” Popp says.

Looking specifically at Anchorage’s economy, which accounts for roughly half of the $50 billion of economic activity in the state, Popp says there are incremental changes that have been taking place over the last several months that signal the recession is in fact close to bottoming out.

“We’ve been seeing declining job losses, particularly in the Anchorage market, which is what we focus on. And we’re seeing other forms of activity that are giving us signs,” Popp says. “We’re also seeing an increase in GDP for the first time in a long time for the City of Anchorage: 4.2 percent for 2017, which is a positive sign.”

Popp points out that Alaska is out of practice when it comes to handling a recession.

“We haven’t had one since the 1980s. We’ve had industry downturns, but we’ve not had a full-blown recession since the great recession of the 1980s,” he says. “And recessions are a necessary evil in any economy because they happen whether you want them to or not. We’ve been lucky to go nearly three decades without one—it’s almost unheard of to have 2 percent growth per year over that time frame.”

Since crashing oil prices instigated this recession, Anchorage lost about 5,500 tracked jobs. However, trending lower oil prices weren’t bad for all market segments in the Last Frontier. Those able to take advantage of lower fuel prices found opportunities for growth.

“The airport was a big opportunity for Anchorage in the fact that there was significant growth in volume and jobs at the airport related to air cargo,” Popp says. “The airport sees more business when oil prices are down in the sense that air cargo becomes cheaper because it’s less expensive to transport things by airplanes that use a lot of jet fuel.”

Another industry that benefits from lower oil prices is tourism, which accounts for 10 percent of jobs in the Anchorage area. Tourism has seen significant growth over the last few years. “In that regard, we’ve seen some good positive signs compared to where we were in the 1980s; in a lot of ways these [industries] have helped us mitigate the impact of the recession,” Popp says. “Having said that, we’ve got a ways to go, and we’ve got more things to do to reinvest in ourselves.

“For generations to come, Alaska is going to be a resource extraction state. That can be resources from energy to minerals to even tourism, because tourism, in a lot of ways, is a resource extraction industry in the fact that we’re exporting our environment to visitors. We also have seafood, another key element in this.”

A report released in September and authored by Guettabi with support from Northrim Bank found that out of thirteen historically energy-dependent states, six experienced economy-wide job losses as a result of declining oil prices, starting in 2014. Out of those, North Dakota and Alaska are the only two that continue to be in recession.

Alaska’s struggle to shake off this recession is tied to both private sector and government reliance on oil, Guettabi explains in the report.

“The ones that don’t have a lot of oil revenue dependence seem to recover a little bit faster because they only had that private channel dependence, and their budgets weren’t struggling as much as ours,” Guettabi says. “All the indicator variables we evaluate point to Alaska being in the tail end of the recession, but the recovery of the jobs lost will be elusive as both the oil sector and the government
sector are considerably smaller than they were four years ago. The future of Alaska’s economic
development will rest on the success of the traditional basic sectors, the pursuit of new opportunities, and on whether the state can address its leaky bucket by ensuring that more of the value generated in Alaska stays in state.”

Guettabi points out that leveraging the state’s strengths and retaining more money through localizing the supply chain and investment in workforce development is the way forward.

Not just economists feeling optimistic about 2019

“While Alaskans have tepid feelings about the current state of the economy, optimism about the future is growing,” states a news release from the Department of Commerce, Community, and Economic Development. “The Alaska Confidence Index readings have been up and down on a quarter-to-quarter basis this year, but the overall trend has been positive since the first quarter of 2017. While it is still unclear when and how the economy might return to where it was in 2015, rising economic confidence is one signal that the recession might be ending.”

Britteny Cioni-Haywood, director of the Division of Economic Development, explains that though economists don’t use the Alaska Confidence Index in their predictions, it is used to measure the general population’s confidence in the health of the state and local economies, their personal financial situation, and expectations for the future.

“This index, just like ones used nationally, takes a temperature of how people are feeling about the economy,” Cioni-Haywood says. “When the economy is strong or strengthening, confidence increases, and just the opposite [occurs] during downturns.”

Even if Alaska does emerge from recession in 2019, it doesn’t mean the state will immediately begin experiencing economic growth.

“It’s going to take a little while for investment to be deployed, hiring to start to ramp up, construction numbers to start to increase, investment numbers starting to increase—that takes a while,” Popp says. “The one thing about the bottom of a recession that often gets overlooked is that it is a buying opportunity for businesses.”

Popp points out that the bottom is when land, building, and construction costs are at their cheapest.

“And if there are companies wondering when is the time to invest, I would be urging them to look at their plans, dust them off, and start to take a look at the numbers. Think about whether now is the right time to get out and start investing,” Popp says. “Often businesses miss the bottom of the cycle.”

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A few years ago a friend and I were on a road trip exploring Alaska, somewhere in the vicinity of the Denali Highway. At some point we saw a side road, pulled onto it, got out to walk for a while, and stumbled across one of the locations where the Trans Alaska Pipeline System (TAPS) transitions from above to below ground.

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