Monday, August 31, 1998

Alaska economy holds up under low oil prices

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Economists cite technology developments and economic independence as factors in state's stability

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Last modified at 3:14 p.m. on Monday, August 31, 1998

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By JIM CLARKE
THE ASSOCIATED PRESS

ANCHORAGE - A decade ago, when oil prices tanked, so did Alaska's economy. House values dropped by half in Alaska's largest city and unemployment shot up.

Oil prices are doing it again, but this time the state is setting employment records and the economy is cruising along.

So what gives? Two trends, say economists who watch the state. New technology has sharply cut the cost of producing oil. At the same time, Alaska's economy has become a little less dependent on oil and a little more like the rest of the nation in creating larger retail and service industries.

A raft of rosy news during the past few months, in the oil patch and elsewhere, has helped cushion the blows of a weak Japanese economy and two years of poor salmon runs in Bristol Bay.

In the span of three weeks this month:

• Interior Secretary Bruce Babbitt cleared the way for broader oil exploration in part of the National Petroleum Reserve-Alaska, an Indiana-sized patch of land near oil-rich Prudhoe Bay that could hold billions of barrels of crude.

• Arco Alaska Inc. and four partners said they would spend up to $100 million during the next four years to study whether a natural gas pipeline should be built from the North Slope to the ice-free port of Valdez.

• Anadarko Petroleum Corp. signed a deal with the Arctic Slope Regional Corp., the North Slope's Native corporation, to explore for oil on 3.3 million acres south of the Prudhoe Bay oil complex.

All this interest in Alaska comes at a time when oil prices are near historic lows, adjusted for inflation, hovering around $12.50 a barrel.

Roger Herrera, a former British Petroleum executive, credits a broad range of new technologies developed over the past decade for changing the economics of oil production in Alaska and worldwide.

Such breakthroughs as three-dimensional seismic interpretation, powered by computers too expensive for the oil companies to use routinely a decade ago, and directional drilling, have cut the cost of producing on the North Slope from more than $10 a barrel in the 1980s to about $4 a barrel today, Herrera and others say.

``Until the price of oil goes up again, nobody's going to realize the benefits of what's been happening,'' Herrera said.

What's been happening, at least for the oil companies, is starkly different from 1986, when low prices began years of retrenchment and cost-cutting. Payrolls in Anchorage dropped along with property values. In Juneau, oil revenue drops cut into state programs, leading to layoffs, home foreclosures and business closings.

By 1994 the oil companies were leaner and ready to begin exploiting the cost-cutting technologies tough times forced them to develop.

At about the same time, the Anchorage area, with about half the state's population, began a retail building boom that hasn't eased yet. Kmart, Wal-Mart, Costco and Home Depot all have opened stores in the state in the past five years.

In the past year, oil field construction companies have added hundreds of welders, electricians and engineers to their payrolls as new North Slope fields come online and old ones, such as Prudhoe Bay, got makeovers to boost production.

And earlier this month, that ubiquitous clothing retailer The Gap opened its first Alaska store, in Anchorage. Longtime Alaskans pointed to that as a sign that the old Alaska, where Sears passed for a fancy store, was gone forever.

Even lifestyles have changed, said Jack Roderick, who moved to Alaska in 1954 and was Anchorage mayor during the 1970s.

``People didn't used to get outdoors in the winter time. That was a big deal. You'd sort of hunker down. People who could afford it would go to Seattle, and people who couldn't would stay and shoot their moose'' to fill the freezer.

``Now we have bike paths and ski trails and outdoor skating. It's a whole different psychology,'' Roderick said.

Alaska's economy has been based on its vast natural resource wealth since the United States bought the territory from Russia in 1867. In the past, that has meant sharp boom-and-bust cycles, pegged to the price of gold, fish, timber and finally oil.

But in the past decade, the state, and especially Anchorage, has become more like the rest of the nation, said Neil Fried, an economist with the state Labor Department. The cost of living, while still high compared with Lower 48 standards, has moderated, he said.

The economist credits the broader retail and service sector with cushioning the effects of lower oil prices.

Unemployment dropped to 5.2 percent in July, a record low for the month. It was down from 6 percent in June and 6.7 percent for July of 1997.

``Even though oil remains the state's biggest industry, it's not as dominant as it was 12 years ago,'' Fried said.

Still, there's no other state where oil, fish and mining play as large a role, he said.

``You turn on the radio, and everyone in the country listens to the stock market, but Alaskans listen for gold prices, and oil prices and if it's the right time of the year, we listen for the fish prices.''

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