February 15, 2016
Monday PM

The very first thing everyone needs to get a handle on in this Alaska financial crisis is that the price of a barrel of oil is not the primary cause of this disaster. Nor have production levels on the North Slope in the past two years declined significantly. 200 million barrels went through that pipeline in 2013, and somewhere between 380 million and 390 million barrels of oil have gone through that pipeline in 2014 and 2015. For the last six months of 2015 the oil companies produced 20,000 more barrels per day. In 2015 oil industry employment in the state of Alaska actually increased marginally throughout the year. And the state of Alaska did not collect a dime in oil taxes from those rats, their buddies, in 2014 and 2015.

Deal with facts, not bullcrap.

Oil patches throughout this country starting in 2014 have gone from deep recession to major depression economically, but in Alaska oil company employment and production have increased. What your state legislature in combination with that ineptly corrupt weasel of a former governor, Sean Parnell, did in the early spring of 2014 in combination with $16 million of oil company propaganda was to convince just enough of the electorate voting (What was it 13% of registered voters or something?) in this “Yes Means No, No Means Yes” election to approve replacing the old oil tax formula with this new tax structure where the oil companies do not pay a dime in tax to the state until the price of a barrel of oil exceeds $113 a barrel. Governor Walker has even gone on national TV and admitted we don’t get a dime until the price is $110 a barrel. That is fact.

And as fact it is unacceptable, for it not only bankrupts the state government it also bankrupts the citizenry. The oil tax formula must be changed. Now! No other taxes at any level can rationally be considered until this is resolved.

Herein also the first conundrum. What has in fact happened in Alaska the past two years is the state government has subsidized the oil industry by not collecting any taxes, and the oil industry has merrily produced away and profited throughout these two years even as the price of oil declines on the markets, because they are not paying any taxes. In relative terms that subsidy so far in direct outlay is no less than $5.5 billion, but the actual cost because of the lack of that money is double, $11 billion. You don’t have that money, you have to find it somewhere else. The net effect of losing one dollar is a two dollar negative change in financial condition. You lost the one dollar and need another dollar to make it up; that’s two bucks. So to the end of 2015 the burn is no less than $11 billion.

By the end of 2016 that number will exceed $20 billion.

Apparently, none of you people understand math very well.

Nor, clearly, do you understand consequences.

What was a $16 billion state general reserve account at the beginning of 2015 is a memory in less than one year. That is because our insanely corrupt state government has been subsidizing a jobs program and a profit program for the oil companies.
I have no doubt about two things. The oil companies knew in 2012 or 2013 what was going to happen to oil prices in 2014 and 2015. That is in large measure their motivation for financing this oil tax formula change. Big businesses know what is going to happen over yonder horizon with exceptional accuracy; even small businesses are often pretty good at that. A fair number of elected officials probably had some sense of what was going on, but lacking the sophistication of the oil companies, probably did not understand why.

Had free enterprise been allowed a more natural course, and the state had collected its share as the oil came out of the ground, the pumps would have stopped about 15 months ago. The critical advantage to this is the oil would still be in the ground, and several hundred million barrels of oil would not have escaped with taxes unpaid. At some future date the state and its citizens would, therefore, still profit from it.

Instead the option chosen, and don’t think for a moment it was an unconscious or accidental choice or consequence, was to subsidize the oil companies to keep Anchorage and Fairbanks from going into immediate recession/depression and a significant outmigration of oil industry employees.

Instead of allowing free enterprise to operate and in this instance to suffer the consequences, i.e. major economic recession, this cabal of corruption chose a short-term solution to benefit two big cities for a very short period of time at the cost of the bankrupting of the entire state and its citizenry.

$20+ billion and counting by the end of this year.

You have to get a handle on what has really happened and is happening; what the problem is; before you can fix it.

Nor forget for a moment the history of this state. At a considerable distance from the lower 48, there is no motivation for large-scale industrial operations, particularly those that produce finished products, to operate in this state. They will operate near railroads, ports, and road networks most proximate to their markets and to their suppliers. Alaska fails in that regard completely because of geography, so besides national defense, extractive industries have been the primary economic driving force throughout the history of the state and territory.

There are ghost towns all over the place up here. When the resource extraction is concluded, the people leave.

So the idea of a massive outmigration of 500,000 or more people in the next few years, as I have discussed previously, is not the product of an overactive imagination, but rather of sound analysis. And, yes, there is plenty of historical precedent.

What would have happened were the old oil tax formula still in place, and the bulk of the state taxes were collected up front? That is a question that needs fairly to be addressed for it forecasts the pitfalls of the present situation. That analysis in general terms is also relatively simple.

By the end of 2014 oil production would no longer have been profitable, and the pumps would have been shut down. About $2.5 billion in taxes would have been collected, and in 2015 about 180 million barrels of oil worth more than $2 billion in taxes under the old oil tax formula would have remained in the ground for future use. Anchorage and Fairbanks would both take major economic hits, and the price of real estate would have gone way down fast as oil company workers found warmer weather to wait out this economic storm. A year from now we would still have at least $11 billion in the state general reserve account instead of the projected –zero- by February 2017. And there would still be 180 million barrels of untaxed oil in the ground.

No question that major economic recessions in Anchorage and Fairbanks would suck, and the cost to those communities quite high, but what these people did was blow the state’s whole wad before the fact and without your permission on an idiotic concept that bought those two cities two years of economic well-being. Had free enterprise been allowed its natural course, we would be dealing with a recession of major proportions up north that started a year ago, but our financial position at the state level would have been $12 billion stronger as this year ends. It’s a lot easier to deal with an economic recession with money in the bank, but these morons tossed it all away.

Think real hard before you convince yourself that the idiots who brought you this mess are somehow going to get you out of this mess.

The primary proposal calls for roughly a $400 million annual budget reduction, a 6% state income tax on individuals, and the use of the Permanent Fund over a period of less than ten years to basically “maintain an even strain.” Now they say they are just going to use the earnings of the Permanent Fund, but their numbers don’t jive, so that is tripe. We are going to “maintain an even strain” for a decade by blowing the Permanent Fund, which obviously was not so permanent after all. We’ll maintain government employment and everything at this level for ten years, and then we will be broke.

But wait, for an angel shall appeareth on yonder horizon a decade hence called a gas pipeline that will rescue us all from prospective ruin, and we shall all live happily ever after.

That is not a joke. That fantasy is their main proposal.

Come see me about buying my used car if you are willing to bet your family on this madness.

Al Johnson has done a service by bringing our attention to Associate Professor Holly A. Bell’s article, “Occam’s Razor Can Cut Alaska’s Budget Problems to the Bone.” Reference to Occam’s Razor is a literary flourish that is detracting and somewhat inaccurate; it is highly unlikely the simplest solution will be the best solution in Alaska’s case; but beyond that first paragraph this is an excellent article that points out the essential madness of current proposals and also includes excellent price analysis data on oil and gas prices and gas pipelines; to wit, this is a pipedream (literally) that is not likely to happen, let alone something to bet and plan on.

Former U.S. Senator Judd Gregg has written an article readily googled entitled “Will Alaska Become the Next Detroit,” which discusses Governor Walker’s proposal for a $2.5 billion pension obligation bond, the financial instrument that has bankrupted both Detroit and Puerto Rico. This article is flawed by Senator Gregg’s misconception about oil prices as causality, and here he is just wrong, but the key theme is about the consequences of these pension obligation bonds, a subject many of you need to focus on.

Judy Brady buzzed through Southeast last week fronting for a group called “Alaska’s Future,” speaking before the local Chambers of Commerce to encourage the idea of spending the Permanent Fund. Her presentation was incredibly naïve on several points, starting with the belief that the price of oil is what created this mess. I understand this group is sponsored at least in part by GCI, and their motivation is to keep their business investment from tanking; and I don’t really have any problem with their initiative. I am a customer, and I wish them well. But blowing the Permanent Fund to keep everybody happy for the next ten years is not necessarily the best solution to our dilemma.

Here we have a bunch of right wingers, purported free enterprisers, being as inconsistent and as hypocritical as is possible, proposing a ten-year rigged deal to maintain the status quo, so they can keep making money. The first problem is that is not necessarily a possible solution which, of course, is what the lobbying is all about.

State Senator Bert Stedman, for example, as of June 2015 has insisted the Permanent Fund is untouchable, and I have no idea how many others currently in office have this view. Not the worst position to take right now, as far as I am concerned, but that means in less than two years we are completely out of money and the state government collapses.

I am convinced litigation will so tie up the Permanent Fund that it will not be useable as a source of current revenues to be spent for the foreseeable future.

Buying ten years almost sounds like a good idea, but I am not sure but it might be the worst idea of all. Right now there are resources available to help people relocate and re-educate; ten years from now there will be nothing. At that point GCI’s well-being over the next ten years is at best a very minor concern except, of course, to GCI.

Less than two years now, and the clock is ticking, and I am not sure but it all already may be a moot point. The real estate markets are grinding to a halt as we speak, and not just up north. People are talking a lot about this, are very worried, and unfortunately in too many instances do not understand what has happened. The current inclination is denial, tinged with the awareness there’s a monster right outside the door.

The proposed solution is wait ten years for the next resource extraction boom. In which case let free enterprise clear the state out, save the state’s resources and money, and wait ten years. It may be the best solution there is in spite of the personal hardship. Giving the oil companies a free straw in perpetuity makes no sense at all.

David G. Hanger
Ketchikan, Alaska

Received February 15, 2016 - Published February 15, 2016

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