Crude and Rude: Alaska’s Budget Woes

Pardon him, Theodotus: he is a barbarian, and thinks that the customs of his tribe and island are the laws of nature.

– George Bernard Shaw, Caesar and Cleopatra, Act II

One of Alaska’s recurring problems is its unrelenting provinciality. The price of crude oil, for example. Alaskans think that the declining price of North Slope crude oil is somehow a personal affront to Alaskans. A conspiracy, even.

Crude oil is an international commodity. There are 90 million barrels of crude oil produced on this planet each and every day. Alaska produces about half a million barrels a day. That’s a little over half of one percent of world production. Even the increased production from fracking U.S. shale amounts to only about 2-3 million barrels a day. Let’s be clear about this: the sharp decline in crude oil prices – and Alaska’s revenue stream – is a result of decline in demand, not any dramatic increase in supply.

China, depending on how you measure it, is the world’s largest or second-largest consumer of crude oil. China’s economy has cooled off considerably, that’s sharply reduced its demand for crude oil. Much of Europe remains mired in a recession or painfully slow recovery from a recession; hence, lower demand for crude oil from Europe.

Conspiracy wingnuts argue that the recent decision by the Organization of Petroleum Exporting Countries (OPEC) to hold current production levels is an effort to sabotage and bankrupt the United States’ oil shale production. And that the impact on Alaska is collateral damage. But the wingnuts are wrong for two reasons: the overwhelming majority of oil shale production in the U.S. works at prices above $50 per barrel. And OPEC can’t drive prices that low without maiming itself. For example, Venezuela makes up about 25% of OPEC’s total production. Venezuela’s internal fiscal problems make a sharp decline in crude oil prices a financial crisis for that country. It’s in no position to produce less.

The second reason the wingnuts are wrong is that U.S. oil shale production is too small to have a significant global impact. In fact, it’s too small to be of concern to OPEC.

The sharp decline in crude oil prices isn’t a product of some vast, international conspiracy. It’s a consequence of the law of supply and demand. And, as in the case of all international commodities, the price is set by global supply and demand.

Alaska’s problem is that for the last 40 years, crude oil has an unreasonably large role in state revenues. Like Russia, Norway and Venezuela, Alaska’s economic prosperity rises and falls with the price of crude. And when the price of crude declines, like Norway, Russia and Venezuela, Alaska has fiscal palpitations.

While the Alaska Legislature may not be very smart, they were at least smart enough to recognize the problem. In 1990, the Legislature passed and the voters adopted an amendment to the Alaska Constitution, creating the Constitutional Budget Reserve (the CBRF). The explicit purpose of the CBRF was an is to tide the State of Alaska over when crude oil prices – and State of Alaska revenue – decline. Monies get placed in the CBRF in various ways. The most important is direct appropriations to the CBRF by the Legislature when crude prices are high and times are good. The Legislature hasn’t done a good job at that; they have usually found other ways to spend the surplus money.

As a result, at the end of FY 2013, we had about $12.2 billion (PDF) in the CBRF. That sounds like a lot, but in relation to the State’s annual operating and capital budget, about $7.3 billion for FY 2015, it’s a thin blanket on a cold night. As you read this blog post, we are burning through that CBRF, because the FY 2015 budget was based on estimated crude oil prices higher than the current market prices.

So, in one sense, this was a foreseen fiscal crisis, and the CBRF is there to cushion the impact of the crash in crude oil prices on Alaska’s finances. The problem, of course, is that we have no idea if or when crude oil prices will climb back up to what the State of Alaska has required to fund the current levels of government. It’s unlikely we can shrink government sufficiently to meet the short fall. Citizen expectations, existing commitments and political realities will intervene. Sure, the Legislature can make modest cuts, but the reality is that there’s not a lot of fiscal fat in the budget.

There is a separate revenue stream from the Alaska Permanent Fund, amounting to about $1 billion a year, but the chances of the citizens letting the Legislature take their precious permanent fund dividends are exactly zero.

Which leaves Alaska with really two choices: One is spending down the CBRF and hoping that crude oil prices return to recent levels before the CBRF is exhausted. This is betting on the Drunkard’s Walk, as it were.

Or, more sensibly, the Legislature could find new sources of revenue. Like a state income tax. You know, paying our own way instead of being the financial prisoners of Big Oil. All it would take is intelligence, vision, political courage and persuasion. You could even design the tax to provide a modest rebate to taxpayers when crude oil prices were high. Think about it: the crude is going to run out at some point, and citizens are going to have to pay their own way then. Why not now?

But, of course, intelligence, vision, political courage and persuasion are all in short supply in the Alaska Legislature. Conspiracy theories are easier. And spending down the CBRF is easier still.

WC expects the Legislature will make token cuts, defer necessary capital projects, tap heavily into the CBRF and continue to whistle as it walks past the graveyard. Because the Alaska Legislature is a lot more predictable than the price of crude oil.


2 thoughts on “Crude and Rude: Alaska’s Budget Woes

  1. Time to heed the words of our late Governor Jay Hammond: “Don’t repeal it [State Income tax] or you’ll cut the one string connecting the citizen’s pocketbook to the government purse, and see state spending soar. If people no longer feel it’s their tax dollars “those idiots in Juneau are spending” a major restraint on government growth and spending will be lost. Once repealed, we’ll never get it back until we’ve raided all other revenue sources, and/or traumatically cut even crucial state programs.”

    “To make my case I pointed out that in the late 1970s, the income tax brought in about $1,236, 334,217 billion (note: as converted to 2014 dollars) annually. With repeal that benefit would not only go mostly to those who least needed it but to nearly one quarter of Alaska’s work force who were non-residents.”

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