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UAA economist gives take on oil influence

Posted: Wednesday, March 09, 2011

Oil will continue to be the lifeblood of the state’s economy, said a University of Alaska Anchorage economist who flew to Juneau to explain those views and how to keep that oil flowing.

MICHAEL PENN / JUNEAU EMPIRE
MICHAEL PENN / JUNEAU EMPIRE

Scott Goldsmith of the Institute of Social and Economic Research at UAA presented his research and recommendations at a public lecture Tuesday. His speech discussed petroleum’s overall impact to the state and whether or not that impact can last another 50 years or more.

Goldsmith described Alaska’s economic evolution since statehood, and how much of it is because of petroleum. He said we started out 50 years ago with about 90,000 jobs, limited support businesses, an underdeveloped infrastructure, a limited tax base and wages below the national average.

Furthermore, he described a federal domination with 80 percent of the jobs being from federal activities and 15 percent in resources such as mining, seafood and timber. Other sources, such as tourism, had a limited presence.

“Tourism was at its infancy and not much else was going on,” he said.

He said today the federal government covers only 34 percent of 374,000 jobs, according to 2007 figures. Oil contributes 34 percent of the jobs, tourism and air cargo give 13 percent and timber, mining and seafood have 11 percent. He said there is now a rich infrastructure, large tax base and diversified economic structure.

To demonstrate oil’s impact, he explained if oil were not a part of today’s economy the state would look remarkably similar to how it did in 1960.

“This is because the underlying structure of the economy would be the same,” he said. “Sure, there would be private sector growth and building on existing industries, but 59 percent of jobs would still be federal.”

He said wages would still be 10-20 percent below the national average and there would be barely more than twice as many jobs as in 1960 as well as continued underdeveloped infrastructure and a limited tax base. He said tourism would account for 18 percent of the state’s economic structure while timber, mining and seafood would make 16 percent.

He said Alaska is an “island economy,” meaning it has a small population and is remote, things that are virtually impossible to overcome except in some niche markets.

This is where Alaska’s oil market comes in, which Goldsmith estimated has created 60,000 jobs directly or indirectly as of 2007. He credits this job creation to high petroleum wages, which can average more than $100,000 per year. He compared this to tourism wages, which can average $29,000 annually but still often will last only a few months in a year, to demonstrate that oil is more relevant to permanent job structures and increasing purchasing power.

The other reason for the job creation is that a small number of oil producers form an inverted pyramid leading to a broader range of purchases in other industries, like transportation, engineering and utilities among other businesses. He said such a pyramid is not present in tourism or fishing.

Another contribution is that the revenues create state and local jobs.

There are also spinoffs from petroleum that create an additional 60,000 jobs plus lighter tax burdens, greater public spending, senior citizen’s services and seasonal stability.

However, Goldsmith said there is a downside.

“A troubling indicator is oil production has been falling while the population has been increasing.” He said we now produce one barrel per capita per day and high oil prices have diverted attention from this decline. He said growing state employment has wrongly suggested Alaskans aren’t dependant on oil, and also people don’t look at oil production beyond the next 10 years.

Goldsmith presented a wealth preservation strategy by thinking of oil wealth as an asset. He said this involves capping oil spending at $5 billion a year to preserve it for future generations.

“If we really believe what (the state) Constitution says, it’s for the benefit of all Alaskans,” he said.

He said spending has gone above that, using general funds and permanent fund dividend financing generated from petroleum. He said higher than anticipated oil prices generated by luck have kept the state on a sustainable spending path for now.

He said, however, if Alaska wants a greater level of public spending to maintain this path, it would involve new management and budgeting away from current petroleum revenues, likely involving higher taxes.

“This would be incredibly challenging because no one wants to pay taxes when the state is accumulating a growing saving account,” he said.

Northrim Bank sponsored the lecture. Bank President Joseph Beedle offered another way the state can bolster revenue from petroleum producers.
Beedle, who is also president of the Alaska Bankers Association and the immediate past president of Commonwealth North, said rather than increases, reducing the progressivity tax would remove disincentives for big oil companies to remain in the state, saying, “If we get a big enough egg, the goose can die. But we keep getting smaller eggs and need to keep that goose alive.”

“We have zero deposits and loans from oil companies and yet we are supportive to changing the taxes in the long term to keep the oil flowing,” Beedle said. “We believe we’ve got to sustain that industry even though we don’t get money from that industry directly.”

• Contact reporter Jonathan Grass at 523-2276 or at jonathan.grass@juneauempire.com.

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