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The Importance of Petroleum to the Alaska Economy: A Gedanken Experiment

presented at Annual Meeting of the

North American Regional Science Association San Francisco, California

by

Scott Goldsmith [email protected]

Institute of Social and Economic Research University of Alaska Anchorage

3211 Providence Drive Anchorage, Alaska 99508

907-786-7710 www.iser.uaa.alaska.edu/

November 2009

This study is one in a series of reports in the ISER program

Investing for Alaska’s Future

Underwritten by a generous grant from

Northrim Bank

With support from

University of Alaska Foundation

ISER / The Importance of Petroleum 1 November 2009

I. Introduction

When Alaska became a state in 1959, the economy was dominated by the federal

government and the highly seasonal commercial fishing industry. Wages were high but

the cost of living was higher, so real incomes were low. The economy virtually shut

down during the winter months, so the population was transient, and businesses had

difficulty taking root. It was said that one had to go to Seattle just to get a haircut. No

one knew where the state would get the money needed to operate, let alone to build the

infrastructure necessary to stimulate the development of the economy.

Fortunately, oil and gas had just been discovered in south central Alaska in Cook

Inlet, and the taxes from its development began to flow into the treasury. During the first

decade of statehood, petroleum revenues (about 25 percent of the total) provided a

much needed boost to the public sector. High-wage, year-round jobs in the oil patch and

in downstream processing (refining, ammonia urea production, and LNG) provided a

boost to the private economy.

Then in 1968 North America’s largest oil field—Prudhoe Bay—was discovered on

state land on Alaska’s North Slope above the Arctic Circle, and the transformation of the

economy began in earnest. In the 40 years since that discovery about 16 billion barrels

of oil—worth $500 billion—has been produced from the North Slope oil fields. The state

has collected $141 billion (2008 $) in taxes and royalties. The economy today is four

times its size at statehood. The infrastructure, at least in the urban areas, is well-

developed and modern. The population is stable and businesses providing support

services to other businesses and households have flourished. Although the cost of living

is still high, wages are also high so real incomes are above the U.S. average. Non-

petroleum businesses are lightly taxed, and households pay virtually no state taxes. In

fact, every Alaskan gets a cash dividend from the state each year. Per capita public

spending is higher than any other state.

Yet the role of petroleum in the transformation of the economy is undervalued by

much of the population for two reasons: First, only about 15 percent of current Alaskans

were alive or living in the state before petroleum became a force in the economy in

1968. The rest of us have no first-hand knowledge of how small, fragile, and poor the


economy was at that time. Of the 15 percent who were here, many were too young to

remember, and many of the rest selectively remember the “good old days” rather than

the reality. To those born in the state since the discovery of Prudhoe Bay, Alaska has

always been a place where jobs and money have been plentiful and many have given

little thought to their source. To the many Alaskans who have moved to the state from

somewhere else, Alaska has a veneer of similarity to the other, more mature and fully

developed economies from which they came. The importance of petroleum in creating

that veneer is usually not recognized.

Second, petroleum—unlike commercial fishing and, in recent years, tourism—is

largely physically invisible to the average Alaskan. In many communities across the

state, the fishing boats dominate the harbor and fishermen, the streets. In summer

tourists throng through the downtowns of every city and can be found at most good

fishing spots. From this it is easy to get the impression that these industries are

generating the jobs and revenues that drive the economy when, in reality, they

contribute only a small, albeit important, share to the total.

Petroleum exploration, development, and production on the other hand take place

far from the population centers of the state, and few Alaskans have ever seen first-hand

the billions of dollars of infrastructure on the North Slope that supports those efforts.

Furthermore, the petroleum revenues that support most state and a large share of local

government spending quickly lose their association with the industry when spent by the

state. Most Alaskans do not connect a new high school or senior center in their

community with revenues from petroleum.

But it is important for Alaskans to understand the role that petroleum has played in

the development of the economy and in the prosperity that it has brought to the state

because the era of Prudhoe Bay oil is coming to a close. Oil production peaked in 1989

and has been declining at an annual rate of about 5 percent for the last two decades. At

the same time, employment in the industry is momentarily at an all-time high because

squeezing each additional barrel of oil out of the ground becomes more labor intensive

as one gets to the “bottom of the barrel.” However, because there are fewer barrels

produced and the cost of producing each barrel is growing, the clear trend is toward


more challenging times for the industry, and consequently for the continued prosperity

of the state economy.

If Alaskans do not understand the role petroleum has played in creating the

prosperity they enjoy and have come to expect, they will have a difficult time working in

partnership with the industry to take maximum advantage of future opportunities to

sustain the industry as the primary driver for the economy. The purpose of this paper is

to help Alaskans understand the role of petroleum in the economy so that Alaska

economic development strategy is grounded in realities, rather than myths and

misconceptions.

The plan for the paper is simple. The next section briefly discusses why the standard

method of input-output analysis used by regional economists is inadequate to describe

the importance of a “transformative” industry like petroleum on the Alaska economy.

Section III presents an alternative model that does a better job of capturing the structure

of the Alaska economy and that forms the basis for the analysis in Section IV—the

Gedanken experiment, or thought experiment. That analysis takes the description of the

economy presented in Section III and strips away the employment and personal income

attributable to seven different factors identified with the contribution of petroleum to the

economy. The result in Section V is a description of the Alaska as it would look today if

petroleum had not been discovered and produced in Alaska during the first 50 years of

statehood. It is a picture of a very different economy.


II. Measuring the Importance of an Industry to a Regional Economy

The standard method economists use to estimate the importance of an industry to a

regional economy is input-output analysis. A regional input-output model is run with and

without the final demand associated with the sector being analyzed, and the difference

in output, income, and employment between the two cases represents the economic

impact of that sector.

That method does a good job under many circumstances, particularly when the

sector under analysis is small in relation to the total regional economy, but when the

sector under analysis is “transformative” or dominant, it falls short. At best it then

provides only an instantaneous snap shot of output, employment, and income

attributable to that sector.

This input-output method fails to capture two possibly important elements of the

contribution of a transformative sector to a regional economy because it does not

provide historical context. First, it does not account for the possibility that the

transformative sector may have positively impacted the size of one or more other

unrelated basic sectors of the regional economy. Second, it does not account for the

possibility that the structure of the economy (reflected in the total requirements table of

the input-output model), may be different today because of the historical presence of the

transformative sector.

These “spillover” effects on other basic sectors and the structure of the economy

could be substantial, and ignoring them would then underestimate the importance or

contribution of one sector to the regional economy.

Two possible approaches to incorporating them quantitatively into a more

comprehensive treatment of the importance of a transformative sector on a regional

economy would be either ad hoc or time series modeling. Neither is really satisfactory.

The ad hoc approach would not be grounded in the information reflected in the input-out

model. Time series modeling, either in the form of a dynamic input-output model or an

econometric model, would be prohibitively expensive, time consuming, and impossible

to construct over long time intervals in sufficient detail because of data constraints.


This study of the importance of petroleum to the Alaska economy takes a different, if

somewhat eclectic, approach. It begins with an economic base model that replicates

the structure of the current Alaska economy. The model is then used to conduct a

Gedanken experiment, or thought experiment. In this Gedanken experiment “spillovers”

associated with the petroleum sector are identified and quantified. The employment

and personal income associated with these “spillovers” are then, one by one, stripped

off the model. The result is a counterfactual picture of the structure of the current

Alaska economy without the petroleum sector and without the economic base and

structural “spillovers.”


III. Modeling the Alaska Economic Structure

The model of the structure of the Alaska economy is based upon 14 “economic

drivers” that form the base of the economy. These are the activities that bring new

money or purchasing power into the region and all the employment, and personal

income generated within the economy is allocated to, or attributed to, one of these

drivers.

The sum of the jobs and personal income attributable to all of the 14 drivers is

constrained in the model to equal published data from the US Dept of Commerce

Bureau of Economic Analysis with one modification. Employment is the sum of wage

and salary employment, active duty military, and the self employed—proprietors

(adjusted to estimate the annual average equivalent number to be consistent with wage

and salary employment figures). Employment is calculated by place of work while

personal income is by place of residence.

Mining, for example, is an important industry in Alaska, consisting almost entirely of

primary production for export outside the state. The contribution of the mining sector to

total Alaska employment consists of miners as well as workers at Alaskan businesses

that supply goods and services to the mining industry and workers at Alaskan

businesses that supply goods and services to the families of the miners and workers at

the Alaskan supplier businesses (This is, in the language of input-output analysis, the

sum of the direct, indirect, and induced effects of mining.). If all of the mines in the state

were to close, thus shutting off the flow of money into the state from this sector, the loss

in jobs would include both the miners and the workers whose jobs depend indirectly

upon the mine as well as the workers whose jobs depend upon the spending of the

payrolls of miners and the related workers at the businesses supplying the mines and

the families of the workers.

Mining is also an example of an industry that fits easily into the input output

framework, since in its simplest form the direct contribution of each basic sector in such

a model is represented by final demand measured by the value of sales. There are two

problems with using this input output formulation in the Alaska case. First, because


many of the economic drivers in Alaska are essentially “enclaves”, the backward

linkages from those drivers to the rest of the economy are modest and so there is not

much information incorporated into the total requirements table of an input-output

model. Second, and more important, many of the drivers are difficult, if not impossible,

to characterize by their final demand, and because the total requirements table is

sparse, the quality of the analysis depends more heavily on getting the characterization

of final demand as accurate as possible.

The locus of many of the large economic drivers is remote from the urban population

centers of the state or otherwise only weakly integrated into the local economies.

Petroleum exploration, development, and production are all conducted from camps

concentrated on the North Slope, above the Arctic Circle. The largest mine in the state

(the Red Dog zinc mine) is also located at a remote site above the Arctic Circle. The

majority of tourists arrive and travel within the state by cruise ship for a portion of their

visit which limits interaction with the local economy. The military is centered in 5 bases

which, although they are adjacent to urban areas, provide many of their own services,

which reduces their economic interactions with those communities. The home ports of

a large share of the commercial fishing fleet are outside the state and consequently

those ships and their crews have only a limited interaction with the local economies

while operating in the state.

Because of these characteristics of these economic drivers, their backward linkages

into the regional economy are limited and, other things being equal, the economic

multipliers for these economic drivers, described in a standard input-output model, are

small. The total economic importance of these drivers is, as a consequence, more

dependent on other factors, such as the residence of workers and the local taxes paid,

than on their purchases from other Alaska businesses. Concentrating modeling effort

on those inter-industry linkages is of limited value to an overall description of the

structure of the economy.

III.1. The Economic Drivers

However, more importance than the paucity of inter-industry linkages in the

application of an input-output model to this analysis is the problem that many of the


economic drivers cannot be easily characterized or summarized by their level of final

demand (or employment) in the same way that is possible for the mining sector. Table

III.1 lists the 14 Alaska economic drivers aggregated into 5 categories.

Table III.1. Economic Drivers for the Alaska Economy

TRADITIONAL RESOURCES Seafood Mining Timber Agriculture

NEW DRIVERS Tourism Air Cargo Other Manufacturing and Services

FEDERAL SPENDING Non-Defense National Defense

PETROLEUM Production State/Local Revenues Permanent Fund and CBR

PERSONAL ASSETS Retirees Non-Earned Income

Traditional Resources consists of the production for export of those natural

resources that have been exploited since before Alaska became a state 50 years ago.

These should be the easiest drivers to fit into the standard input-output framework,

except that published information on the value of sales for export is not available for all

of these sectors.

New Drivers consists of non-petroleum private sector basic activities that have

largely developed since Alaska became a state. It is difficult to estimate the quantity of

tourist spending that actually enters the economy (as well as the composition of

purchases), both because of the enclave characteristic of the cruise ships and the fact

that many of the visitors purchase a package tour before coming to the state which


tends to complicate the interpretation of data on expenditures collected directly by

survey from visitors. The air cargo industry in the state consists mostly of international

carriers servicing their own flights and consequently there are no sales or other

monetary measures of the level of activity in this sector. Information about other

manufacturing and services for export is also very difficult to track down.

Non defense spending of the Federal Government is complicated because it

consists mostly of grants to local governments and transfers to individuals. This data is

available, but parsing it out by how it is spent takes considerable effort. Estimating

defense spending is complicated because a large share is investment related

(construction), which of course is separate from spending on operations—personnel

and procurement.

Petroleum is in its own category because of its size and importance and it is, in turn,

divided into three components to clearly identify the ways that it impacts the economy.

Identifying the final demand or value of production for sale is straightforward, but to this

must be added the value of investment in existing and new fields. This information is

not published, but rather must be estimated indirectly. A large part of the economic

contribution of petroleum comes from the state and local taxes paid which in turn

support a wide range of government expenditures including operations, infrastructure,

transfers to individuals, capitalization of various funds, tax breaks, etc. Sorting out how

these revenues get spent, or saved, is necessary to understand the impact on the

economy. Finally some of the state revenues go into a special fund from which an

annual payment is made to every Alaska citizen. This Permanent Fund dividend is an

important addition to consumer purchasing power each fall. (A smaller account, the

Constitutional Budget Reserve, or CBR, acts as a safety valve to stabilize annual state

government expenditures between years of high and low revenues))

Personal Assets is the final category of money flowing into the state, mostly

associated with retirees who have the choice of living anywhere. Estimating their

numbers and their annual spending, much of which comes from savings and pensions,

as well as spending on their behalf by government, is a challenge. Non retirees also


have financial assets invested outside the state that augment their current income and

increase their purchasing power. The amount of this income is difficult to estimate.

III.2 Model Construction

The model divides total employment and personal income into two segments called

the core and the non-core. Each driver similarly consists of core and non-core

segments which together sum to the total contribution of each driver to the economy.

The core of each driver is the jobs or personal income directly generated by the

inflow of money into the economy. The non-core is those additional jobs or personal

income generated within the economy as the new personal income circulates. The

composition of employment and personal income for 2005 is shown in Tables III.2 and

III.3.


Table III.2. Composition of Alaska Employment in 2005 (thousand)

Core Non-Core 202.72 158.40 TRADITIONAL RESOURCES

Seafood 21.87 10.04 Mining 4.41 4.76 Timber 1.22 .89 Agriculture .1 .06

NEW DRIVERS Tourism 26.37 15.75 Air Cargo 3.74 3.67 Other Manufacturing and Services .33 .32

FEDERAL SPENDING Non-Defense 39.61 32.01 National Defense 34.11 29.98

PETROLEUM Production 19.36 26.10 State/Local Revenues 28.42 21.12 Permanent Fund and CBR 6.35 3.81

PERSONAL ASSETS Retirees 12.96 7.64 Non-Earned Income 3.86 2.27


Table III.3. Composition of Alaska Personal Income in 2005 (Billion $)

Core Non-Core TOTAL $13,376 $10,751 TRADITIONAL RESOURCES

Seafood $579 $681 Mining $275 $323 Timber $61 $60 Agriculture $3 $4

NEW DRIVERS Tourism $909 $1,069 Air Cargo $212 $249 Other Manufacturing and Services $18 $21

FEDERAL SPENDING Non-Defense $3,964 $2,172 National Defense $1,730 $2,035

PETROLEUM Production $1,506 $1,771 State/Local Revenues $1,219 $1,433 Permanent Fund and CBR $752 $259

PERSONAL ASSETS Retirees $1,686 $518 Non-Earned Income $471 $154

Core employment is composed of two parts. The first is employment that is the direct

result of new money flowing into the economy. For example for a typical natural

resource sector like mining it is the sum of four components—wage and salary

employment in mining, construction employment associated with expenditures on the

development of new mines, employment by proprietors in mining, and state government

employment supported by taxes paid by the mining industry.

A more complicated example is federal civilian spending which is the sum of five

categories. The first is federal civilian employees. The second is construction

employment associated with federal agency infrastructure procurement as well as

construction financed by federal grants to state government. The third is employment in

state and local government supported by federal grants. The fourth is employment in


services from grants to non profit organizations (mostly Alaska Native organizations), as

well as from payments to medical providers. Finally, there is an estimate of

employment in trade and services from household spending of non medical (and non

retirement) payments to individuals.

The second part of core employment is an allocation of a share of total employment

in the construction, wholesale trade, transportation, business services, and self

employed categories. The allocation represents the estimated first round instate

purchases by each economic driver beyond those already accounted for and is based

on data from the direct requirements table of an Alaska input-output model.

An example of these inflows forming core employment in petroleum is shown in

Table III.4 for its three component part—production-related activities, petroleum

revenues, and petroleum-based savings accounts.

Table III.4. Core Employment 2005: Petroleum (thousand)

Petroleum Production

State & Local Petroleum Revenues

Savings Accounts: Permanent

Fund & CBR TOTAL 19.365 28.416 6.346

Payroll for Wage and Salary Jobs Petroleum Production 8.979 - - Pipeline Transportation .872 - - Petroleum Processing .400 - - Petroleum Investment in Infrastructure

Construction 2.489 - - State Government 14.386 .261 Local Government 13.748 Retail Trade 2.582 Services 2.582 Instate Purchases Construction 0 0 .217 Wholesale Trade 1.274 0 .108 Transportation 1.529 .281 .054 Infrastructure 3.185 0 .542

Proprietors .637 0 0

The calculation of core personal income for each driver begins with the wages and

salaries associated with core employment (including proprietor income). To this is

added a share of Other Labor Income net of social security. (This is allocated across

both the core and non core workers based on relative wages.). A portion of wages and


salaries is netted out as the Residence Adjustment to get wages and salaries by place

of residence. (The residence adjustment is applied only to core employment. All non

core workers are assumed to live in the region.) The result is net earnings by place of

residence.

All Transfers (consisting of government payments to individuals) are allocated to the

federal civilian, retiree, and the Permanent Fund drivers. A portion of Dividend-Interest-

Rent income is added to the core personal income totals for retirees and non earned

income. (The majority is allocated as part of the non core personal income.)

An example of these inflows is shown in Table III.5 for the three components of the

petroleum driver—production-related activities, petroleum revenues, and petroleum-

based savings accounts. The first element of the economic contribution of each

component is the payroll for wage and salary workers minus a resident adjustment for

nonresident workers. For production this includes four industrial categories—the oil and

gas portion of mining; pipeline transportation; refining and other petroleum

manufacturing; and construction associated with exploration, development, and

production. In addition, it includes an estimate of the payroll of the wholesale trade,

transportation, and other infrastructure industries that sell directly to these four industrial

categories.1

For petroleum revenues, the share of state and local government employment

supported by those revenues is the basis for the payroll estimate. For the permanent

fund and constitutional budget reserve, there are two different payrolls. The first is the

payroll associated with jobs directly created in the trade and service sectors of the

economy when Alaskans spend their dividend checks. The second is the state

government payroll financed by the Constitutional Budget Reserve (necessary when the

current state budget exceeds current revenues).

1 These industries may be thought of as the largest components of the first round of inter-industry

purchases described by an input-output model.


Table III.5. Core Personal Income 2005: Petroleum (million $)

Petroleum Production

State & Local Petroleum Revenues

Savings Accounts: Permanent

Fund & CBR TOTAL $1,507 $1,219 $752

Payroll for Wage and Salary Jobs Mining—Petroleum $914 - - Transportation—Pipeline $49 - - Manufacturing—Petroleum $22 - - Construction—Facilities $234 - - Indirect Infrastructure Purchases $321 $14 $49 State Government Operations - $626 $11 Local Government Operations - $510 - Retail Trade - - $68 Services - - $71

Minus: Residence Adjustment ($251) ($94) ($8) Plus: Net Employee Benefits $217 $163 $28 Plus: Dividend-Interest-Rents

and Transfers $532

The payroll figures are augmented by net employee benefits (contributions to

pensions and insurance).2 An estimate of proprietor income (income of self-employed

workers) is also included for petroleum production because of the presence of some

self-employed workers in the construction, transportation, and infrastructure industries.

Finally, any non-earned income (any income not associated with working) paid

directly to individuals is added. In the case of petroleum, this is the income paid to

individuals as the Permanent Fund dividend.

The total dollar flow for petroleum—the estimated dollar flow that generates

economic activity in the state—is $3.75 billion. About half of that amount comes from

petroleum production (including transportation, processing, and construction) while the

rest comes from the expenditure of current and prior year petroleum revenues.

Once core employment and personal income have been estimated, the remaining

non-core employment and personal income must be allocated among the 14 drivers.

The next table shows by industry how employment has been divided between the core

and non-core and shows that a large share of the non-core is concentrated in industries

2 Net of employee contributions to government social insurance (Social Security).


providing support to households—retail trade, non-business services, and local

government, and also in industries where a large share of jobs are supporting

households—finance and infrastructure (communications, public utilities).

Table III.6. Non-Core Employment Composition 2005 (thousand)

Industry Non-Core Core Total Total 158.403 202.725 361.128

Ag-forestry-Fish 0.339 0.715 1.054 Mining 0.000 10.518 10.518 Construction 5.379 13.098 18.477 Manufacturing 2.510 10.093 12.603 Transportation 5.869 13.382 19.251 Infrastructure 20.060 12.542 32.602 Wholesale Trade 2.553 3.861 6.414 Retail Trade 13.514 22.279 35.793 Finance-Insurance-Real Estate 13.625 - 13.625 Non Business Services 44.960 33.113 78.073 Federal Government 0.000 41.077 41.077 State Government 7.013 17.180 24.193 Local Government 21.509 16.673 38.182 Proprietors 21.071 8.194 29.266

Because of this, the allocation of non-core employment and personal income among

the 14 economic drivers is based on the relative size of core personal income of each

driver. Thus the drivers with large core personal income are allocated large shares of

non-core employment and personal income. This is a reasonable allocation method

given that a large share of the non-core consists of household serving activities and

core personal income represents the direct household purchasing power of each

driver.3

Most of the effort in developing this model has gone into quantification of the direct

effects on the economy of each of the drivers, and little attention has been given to the

inter-industry flows within the economy. This decision has been based on the structure

of the economy which is small and open. Developing the estimates of the direct effects

3 Transfers and dividend-interest-rental income is excluded from driver core personal income when

making this allocation. To include it would involve double counting of its contribution to purchasing power.


has been difficult because of a paucity of good data, but the exercise has been very

useful in increasing understanding of the structure of the economy.

The model is a work in progress. As additional data sources are identified they are

used to revise and refine its structure and its parameters. Fortunately the description of

the structure of the economy generated by the model has proven to be robust to this

process of refinement.

Furthermore, the model results are consistent with a number of independent studies

of the importance of individual sectors of the economy.


III.3. Model Description of Alaska Economic Structure

Table III.7 shows the result of allocating all employment by place of work and all

Alaska personal income to the 14 drivers for 2005. Of the 361 thousand annual

average jobs by place of work, federal spending (excluding retirement payments)

accounted for 136 thousand4; petroleum 105 thousand; traditional natural resources

(drivers at the time of statehood and depicted on the state seal), 43 thousand; new

drivers (since statehood), 50 thousand; and personal assets, 27 thousand.

Table III.7. The Contribution of the 14 Economic Drivers: 2005

Alaska Employment by Place of Work

Alaska Resident Personal Income

Thousand Share Billion $ Share

TOTAL 361.1 $24.127 FEDERAL 135.71 37.6% $9.901 41.0%

Non-Defense 71.63 19.8% $6.136 25.4% National Defense 64.09 17.7% $3.765 15.6%

PETROLEUM 105.16 29.1% $6.940 28.8% Production 45.46 12.6% $3.277 13.6% State/Local Revenues 49.54 13.7% $2.652 11.0% Permanent Fund & CBR 10.16 2.8% $1.011 4.2%

TRADITIONAL RESOURCES 43.361 12.0% $1.977 8.2%

Seafood 31.91 8.8% $1.261 6.2% Mining 9.18 2.5% $.598 2.5% Timber 2.11 .6% $.111 .5% Agriculture 0.15 .0% $.007 .0%

NEW DRIVERS 50.18 13.9% $2.478 10.3% Tourism 42.12 11.7% $1.9774 8.2% Air Cargo 7.41 2.1% $.460 1.9% Other Manufacturing and 0.65 .2% $.040 .2%

4 In this characterization of the economy the federal contribution should be interpreted as the gross

contribution to Alaska economic activity. That is, it represents the effect of the gross flows of dollars into the state without accounting for the taxes and other revenues that flow to the federal government from Alaska that become part of federal spending. The rational behind this approach is that, at least in theory, a large share of federal spending that flows to Alaska could be redirected to other parts of the country. The alternative approach, which would result in a smaller share of the economy attributable to federal spending and a larger share attributable to all other drivers, would be to trace the source of federal spending in Alaska that is not “footloose” back to federal income and other taxes paid by the other economic drivers, like petroleum.


Services PERSONAL ASSETS 26.73 7.4% $2.830 11.7%

Retirees 20.60 5.7% $2.205 9.1% Non-Earned Income 6.13 1.7% $.626 2.6%

The model represents the starting point for the analysis of the importance of

petroleum for the economy. It shows that the current activities of that sector—including

production, revenues paid to state and local governments, and payments into state

savings accounts together account for nearly one-third of all jobs and income in Alaska.

The model allows us to make two types of adjustments to the description of the

structure of the economy which will be performed in detail in the next section as the

Gedanken experiment. First, the core sizes of other economic drivers can be adjusted

based on assumptions about the relationship between petroleum and these other

sectors. Second the size of the non core can be adjusted based upon assumptions

about changes in the size and characteristics of the economy stemming from

development of the petroleum sector.


IV. Stripping Away the Economic Effects of Petroleum

The model of the Alaska economy shows that about one-third of the jobs and

personal income in Alaska in 2005 depended on the petroleum industry—its production

activities, its state and local revenues, and the earnings of the savings accounts funded

by petroleum revenues. If the flow of dollars into Alaska from these sources were to

disappear, Alaska would lose about one-third of its jobs and personal income

What this analysis fails to take into account is the fact that the development of the

petroleum industry since statehood has contributed in several ways to growth of the

other economic drivers as well as to the expansion of the support sector of the economy

and consequently the “bang per buck” of each new dollar that enters the economy from

these drivers. If those contributions are taken into account, our analysis suggests that

the Alaska economy today would be about half its current size if petroleum had not

been discovered and developed in Alaska.

In this section we discuss these contributions, estimate their importance, and

develop a description of the size and composition of the Alaska economy under the

assumption of no petroleum development. The method is that of a thought experiment,

or Gedanken experiment, where we begin with the economy as it is today, as described

in Table III.7 and step-by-step strip away the following seven elements accounted for by

the historical development of petroleum in Alaska:

Table IV.1. Factors Stripped Away in the Gedanken Experiment

Petroleum production (including state and local revenues) Spillover benefits to other private sector economic drivers Extra retiree population Household tax advantage Federal spending tied to higher population Unearned income tied to higher population Larger economic multiplier


IV.1. Petroleum Production (including State and Local Revenues)

As already demonstrated, elimination of petroleum production and the revenues it

generates for state and local government (including contributions to savings accounts)

would result in the loss of about one third of the jobs and payroll of the state. This loss

would be associated with the exploration, development, production, transport, refining,

and manufacture of petroleum products in the state. It would also be due to the

elimination of between 85-90 percent of state general fund revenues and significant

local government property tax revenues in several communities. The savings accounts

derived from petroleum revenues—the Alaska Permanent Fund and the Constitutional

Budget Reserve—would disappear (albeit gradually) and would no longer generate an

annual flow of earnings available for spending. The estimated loss of jobs, population,

and personal income associated with elimination of the petroleum industry is estimated

in Table IV.2.5

Table IV.2. Impact of Elimination of Petroleum Industry on Alaska Economy in 2005

Component Loss Employment (000) 105 Population (000) 179 Personal Income (million $) $6,941

IV.1.a Production A number of studies have estimated the employment and income impact of

petroleum production activities on the Alaska economy. The most recent, completed in

2008, estimated an annual average employment impact of 42 thousand with a payroll of

$2.4 billion (Table IV.3) based on an industry definition including exploration,

development, production, transportation, refining, and manufacturing.6 Although direct

employment in the oil and gas industry (oil producing companies) was small (3.2

thousand in extraction), total employment was large both because of $5 billion of

5 The population loss is estimated as 1.7 times the job loss based on the ratio of population to

employment. 6 Alaska Oil and Gas Association, The Impact of Petroleum on the Alaska Economy, Information

Insights, 2008.


purchases by the petroleum companies from Alaskan companies (Table IV.4) and the

high wages paid in the industry.

Table IV.3. Summary of Oil and Gas Economic Impact in Alaska 2007

Employment Payroll (million $) TOTAL 41,744 $2,410

Extraction 3,245 $496 Refining and TAPS 1,252 $148 Subtotal: Direct 4,597 $644 Support 8,410 $769 Other Indirect* 28,837 $997

*Includes induced impact

Source: Information Insights 2008.

Table IV.4. Oil and Gas Company Procurement: Expenditures on Goods and Services in Alaska, 2007

(million $)

TOTAL $5,042 Oil Field Services $2,207 Services $971 Construction $546 Transportation $449 Trade $351 Other $519

Source: Information Insights 2008.

Although 2007 was a year of high oil and gas prices, payrolls and annual budgets of

the petroleum companies have long been large relative to the total economy. For

example, it has been estimated that the oil companies had spent $51 billion (1998 $)

through 1998 in support of their activities on the North Slope (including operation, but

not construction of the Alyeska pipeline).

Table IV.5 provides a sense of the types of activities that the petroleum industry in

the state requires but does not provide internally. These activities create business and

job opportunities in many industries.


Table IV.5. Examples of Activities Supported by Petroleum Industry Purchases within Alaska

TYPE OF ACTIVITY EXAMPLE OF FIRM Camps and catering Doyon Universal Communications Alaska Telecom Construction ASRC Energy Services Construction suppliers Flowline Alaska Consulting Alaska Anvil Data processing Haliburton energy Services Diving American Marine Drilling Nabors Alaska Drilling Engineering and architecture Lounsbury and Associates Environmental response Pacific Environmental Environmental services CCI Inc Equipment sales and rentals Totem Equipment and Supply Fabrication Peak Oilfield Service Co Human resources Alaskas People Inc Maps Mapmakers Alaska Medical Aeromed Oilfield service and supply Schlumberger Oilfield Services Operations management VECO Permitting Bristol Environmental and Engineering Services Corp Photography Judy Patrick Photography Pipeline construction HC Price Security Doyon Universal Seismic Kuuupik/Veritas Space design Kuukpik LCMF Supply chain management Alaska Supply Chain Integrators Surveying and mapping Michael Baker Jr. Transportation and logistics Air Logistics Well servicing Doyon Drilling Wellhead control systems Dowland-Bach

Although smaller than one might expect based on the volume of production, the size

of the employment impact is considerably larger than had been anticipated by early

analysts, who felt that the absence of any instate manufacturing providing inputs to

production as well as the absence of value added downstream production would limit

the number of instate jobs associated with petroleum. The obvious absence of many

activities conducted out of central or regional offices and the incredibly high productivity

of the early producing wells also contributed to the feeling that the employment impact

of petroleum development would be small. However, it was recognized that the size and

complexity of development of the resource would require an extensive “overhead”


operation within the state which was a sharp contrast with the other resource industries

that were represented in the state.7

Charitable contributions, although small compared to payroll and procurement, are

an important element of the contribution of the industry to the community which is not

reflected in Table IV.3. Since there are not many private Alaska foundations (the

Rasmusen Foundation is the largest), the oil company contributions have historically

been a large share of the total private contributions to nonprofits. For example, between

1993 and 1998, major oil directly contributed 75 percent of industry support and 1/3 of

total support to the United Way of Anchorage.

Charitable contributions have been concentrated in urban Alaska where most

employees live. They cover a broad range of activities, as reflected in Table IV.6, which

shows $8 million of contributions in 1999. The total in 2007 was $28 million. This

excludes the contributions of service companies, other suppliers, employee

contributions, and in-kind contributions.

Table IV.6. Petroleum Industry Charitable Contributions, 1999 (thousand $)

TOTAL $8,095 Human Services $1,670 Community $1,553 United Way $1,378 University $1,301 Education $1,234 Arts and Culture $789 Sports $213 Environment $206 Other $61

Source: Information Insights, 1999.

7 “The petroleum industry clearly differs from any other commodity-producing industries in Alaska’s

experience. The petroleum industry is establishing within the state an executive and administrative component which will give its main operations and planning functions an Alaska base. Furthermore, it relies heavily upon contracting for its various supporting services. This overhead component of the Alaska salmon industry was represented within Alaska only by seasonally imported lobbyists and resident legal representatives; and the minerals and forest products industries simply comprised the Alaskan production extensions of a multitude of individual firm operations headquartered elsewhere. Stated in other terms, employment in these other Alaskan industries has been dominantly productive with a nominal overhead element, while in the emerging Alaska petroleum industry the “overhead” element far overshadows the productive” (George Rogers, 1971 , International Petroleum)


IV.1.b Petroleum Revenues Petroleum revenues have directly accounted for 83 percent of total state general

fund revenues since Alaska became a state—$117 billion out of a total of $147 billion.

Since most state programs are funded out of these general fund revenues (except for

federal transfers) and much of local government spending depends on transfers from

the state, a large share of state and local government operating and capital spending

can be traced back to petroleum revenues.

Table IV.7. State General Fund Revenues: 1959-2008 (2008 billion $)

TOTAL $146.840 Petroleum $117.045 Non-Petroleum $29.794 Taxes. etc. $22.131 General Fund Earnings $7.664

In particular petroleum in a recent typical year (2006) accounted for 60 percent of

total state revenues, including federal transfers and other state funds (non general

fund), but excluding fund earnings (primarily from the Alaska Permanent Fund).

Table IV.8. Total State Revenues Excluding Fund Earnings: 2006 (million $)

TOTAL $7,310 Petroleum $4,359 60% Other State $985 13% Federal $1,966 27%

After netting out local government transfers (assumed to be entirely financed by

petroleum revenues), the share of state government employment supported by

petroleum revenues ican be estimated as the share of petroleum revenues in total

revenues excluding those federal revenues targeted for capital construction projects.8

Petroleum property taxes paid to local governments have totaled $14.1 billion (2008

$) through 2008. Together with state transfers for education and other programs funded

8 This is a simplifying assumption based on the fact that most of the state capital budget is typically

financed by federal grants.


by petroleum revenues, about 35 percent of local revenues can be traced directly to

petroleum.

Together 28 thousand state and local government jobs (out of a total of 62

thousand) depend directly on petroleum revenues, and adding in private sector jobs in

support of the households of these employees the total contribution of petroleum

revenues to employment comes to 49 thousand.9

IV.1.c Permanent Fund and Other Savings In addition to the $117 billion in general fund petroleum revenues, $23 billion of

taxes and royalties has been deposited into the Alaska Permanent Fund and the

Constitutional Budget Reserve. (Total state petroleum revenues through 2008 have

been $141 billion.)

Table IV.9. State Petroleum Revenues: 1959-2008 (2008 billion $)

TOTAL $140.634 General Fund $117.045 Mandated Permanent Fund $15.339 Constitutional Budget Reserve $8.249 ITEM: Special PF Contributions $11.289 ITEM: Total PF Contributions $26.628

The Permanent Fund principal has been augmented by $11 billion in special

appropriations (transfers of money out of the general fund) and today the balance is in

excess of $30 billion. At a 5 percent real rate of return, the fund can generate annual

earnings of $1.5 billion, and since 1982 a share of fund earnings has been used to pay

the annual Permanent Fund dividend to every eligible Alaska resident. In 2005 the

dividend was $846 (It peaked in 2008 at $2,069). The consumer spending this

generated supported nearly 10 thousand jobs throughout the economy.

9 This total is an underestimate because it does not take into account the state and local revenues

indirectly attributable to petroleum such as the state corporate ncome taxes paid by oil service companies and the local property taxes paid by households with an oil industry employee.


The purpose of the constitutional budget reserve (CBR) is to provide a source of

funds in years when the state experiences a revenue shortfall. Thus the CBR is simply

another source of funding for state government from petroleum revenues.

IV.2. Spillover Benefits to Other Private Sector Drivers

The petroleum industry has contributed to the development of the other private basic

sectors of the Alaska economy in several ways. Petroleum revenues have eased the

“tax burden” on these sectors. Generous public expenditures have subsidized the costs

of development and operation of these sectors, and growth in business infrastructure

has contributed to lower costs for all types of businesses. Growth in the labor supply

and the absence of personal taxes have contributed to reductions in the cost of labor.

It is not possible to quantify exactly how much difference these factors have made in

the size of the other economic drivers, but all the evidence suggests it is considerable.

For this analysis we assume the other private basic sectors of the Alaska economy

would be smaller by the percentages shown below in Table IV.10.

Table IV.10. Assumptions: Loss of Basic Sector Activity without Petroleum

Seafood 30% Timber 30% Mining 30% Tourism 30% Agriculture 100% Air Cargo 50% Miscellaneous Manufacturing 0%

However, we also assume that even though these industries would be smaller, they

would offset 10 percent of the loss of petroleum revenue through higher taxes. Since

these taxes would come from nonresidents, they represent a source of new money

flowing into Alaska. The net loss to the 2005 Alaska economy from the reduction in

other private basic sectors is consequently estimated as shown in Table IV.11.


Table IV.11. Impact of Reduction in Other Private Basic Sectors on Alaska Economy in 2005


IV.2.a Tax Burden

The largest nonpetroleum resource sectors—seafood, tourism, mining, and timber—

have, in recent years, contributed about $100 million annually in taxes and other

revenues to support state spending through the general fund. Although there is a state

corporate income tax and specific taxes on different resources, the state has long had a

policy of tax concessions to stimulate development, which has reduced revenues from

the state corporate income tax as well as from these other sources. In the early 1970s,

the largest tax concession was an industrial incentive law which allowed a corporate tax

credit equal to 50 percent of the original investment. There were also concessions

which reduced or eliminated royalty payments for metallic minerals extracted from state

lands as well as lease or rental payments for lands so used.

Furthermore there is no state personal income tax, so the self-employed are exempt

from state tax on their income. Most fish harvesters are self-employed and,

consequently, not subject to the corporate income tax. Without a state personal income

tax, their income from commercial fishing is not directly taxed by the state.

In Appendix A we show that without revenues from petroleum and at the current

level of population, the non petroleum resource sectors might be asked to contribute

three to five times their current amount in taxes—$300 to $500 million. That estimate

assumes a level of public spending consistent with other states (less than current

Alaska per capita spending) as well as sharing of the tax burden with other businesses

and households in proportions similar to other states. Such a burden would increase

the cost of business for some firms beyond the point where they could survive.

(Certainly that argument is common when tax increases are under consideration in the

legislature.)


IV.2.b Targeted State Expenditure Bonus Since 1975 petroleum revenues have allowed state government expenditures to

consistently exceed the per capita average of other states. In Appendix B we estimate

that the general fund “expenditure bonus” has amounted to about $51 billion (2008 $)

out of total state general fund petroleum expenditures of $103 billion. This “expenditure

bonus” has been spent on operations, infrastructure, and fund capitalization—some of

which has been directly targeted to lower the development and operating costs for the

private basic sectors and to try to “buy” new industries to diversify the economy. One

can argue whether the state has invested these development funds wisely; some

investments clearly have not paid off, like the fish processing plant in Anchorage and

the grain silos in Valdez. But other efforts have been more successful10.

A few large operations dominate the mining industry in the state reflecting the fact

that costs are high and that only the largest deposits are profitable to produce. The Red

Dog mine operated for years without covering all of its costs when zinc prices were low,

and the Greens Creek mine closed for several years in the 1990s when metal prices

were low.

In most cases the large mines operating in the state have not benefited from direct

state support for infrastructure development. However, infrastructure paid by state oil

revenues made it easier to build the Red Dog Mine. The state of Alaska, through the

Alaska Industrial Development and Export Authority (AIDEA), authorized the issuance

of over $103 million in low interest bonds to build a road and port facility at the mine

site. A new fund was created within AIDEA to support the building of the road and port

project.

The commercial fishing industry has received state financial support in many forms

over the years. This has included a fish hatchery program, loans to commercial

fishermen for the purchase of permits and gear, support for seafood marketing, the

operation of ports, and management of the resource for sustained yield.

10 Federal dollars have also paid for economic development efforts in the state.


The stated purpose of the fish hatchery program was to take oil dollars and convert

them into a sustainable resource. The state provided grants and loans for 30

hatcheries—some state owned and others owned and operated by nonprofits. The

objective was to enhance salmon returns that had fallen dramatically from the level of

the early 1970s back to the low level of 1960. Although the direct funding source for the

program may have been taxes on fishing, in the absence of petroleum revenues those

fisheries taxes would likely have been needed to pay for more basic government

services.11

Between 1972 and 1992, $41 million in capital appropriations and $74 million in

bonds were authorized to pay for state hatcheries. Annual appropriations for operations

gradually increased from $1 to $19 million. Between 1977 and 1995, $60 million in loans

were made for capital expenditures and $41 million in loans for operation of the

nonprofit hatcheries. The state received $25 million in repayments for these loans.

Overall, the program has not paid for itself in terms of either loan repayments or

increases in tax revenues to offset state appropriations. Problems introduced by the

hatcheries have included depressed prices for fish due to increased supply,

complications in managing the resource due to the mixing of species, and competition

with the private sector for marketing.

It is not clear whether the marginal value of the additional fish has exceeded the cost

of producing and harvesting them, particularly considering that the price of the rest of

the harvest might have been lower as a result of these additional fish. If the cost of the

program (operations and capital) is ignored, it is then likely that the value of the harvest

to the fishermen—even after they paid the marginal cost of the harvest of the marginal

fish and the additional taxes—was enhanced by the program.

The Alaska Seafood Marketing Institute (ASMI) was established in 1981 as a public

corporation subject to the authority of the state, with a mission to increase the economic

11 “The development of the Alaska salmon hatchery program is timed to the rapid rise in state oil

revenues in the 1970s and early 1980s, following the discovery and development of oil on Alaska’s North Slope . . . This rapid increase in state revenues led to corresponding rapid growth in state capital and operating expenditures as well as a search for a way in which the state might use its financial resources to encourage sustainable economic development based on renewable resources” (Knapp 1999).


value of Alaska seafood primarily through marketing and quality assurance. Funding

originally came from a direct annual appropriation of about $2 million (ended in 1997,

but reinstated in 2006 when petroleum revenues rebounded), supplemented by a tax on

processors. In 1994 a tax was placed on the salmon catch, and from 1988 federal

grants augmented state sources.

ASMI has claimed some important successes in pulling the industry through

cataclysmic events—the canned salmon scare in 1982 and the Exxon Valdez Oil Spill in

1989. “In both cases, ASMI launched massive public relations campaigns to avert

market disasters” (Knapp, 2007). Other specific benefits are hard to quantify, and critics

point to the fact that salmon prices have continued to decline and that any tangible

results may be in markets far from where the fish are harvested.

Loans to resident fishermen for the purchase of permits and gear have helped to

keep non-resident fisherman from capturing a larger share of the income from

harvesting of salmon and other species.

Although there have been no obvious large infrastructure investments specifically

targeting tourism, the industry has certainly benefited indirectly from the development of

roads and harbors, as well as the construction of convention centers, museums, and

other amenities.

The international air cargo industry, centered in Anchorage, relies on inexpensive jet

fuel refined in Alaska from Alaska crude oil. Without that supply this industry might be

considerably smaller.

The other natural resource industries (timber and agriculture) have also received

state support over the years.

IV.2.c General State Expenditure Bonus In addition to directly targeted expenditures, considerable petroleum revenues have

been spent to improve the quality and quantity of physical infrastructure. This has also

enhanced the commercial viability of the operations of the private basic industries in the

state. Since 1975 petroleum revenues have allowed state government expenditures to

consistently exceed the per capita average of other states. Petroleum revenues have


also been spent to increase the level of human capital in the state. (State spending is

discussed in more detail in Appendix C.)

For example, good schools attract families. So investments in schools and teachers

in a fishing community like Dillingham enhances its attractiveness as a location for

Alaskans considering entering the fish harvesting industry.

IV.2.d Cost of Business As indicated in Table IV.5, the petroleum industry, through its annual procurement

purchases, supports a wide range of companies providing services in areas such as

communications, construction, transportation, medicine, and engineering—thus,

increasing the range of local business services available to other basic industries in the

state.

In the same way that petroleum has expanded the range of business services

available locally, it has increased the size and skill level of the labor supply. Resource

industries like mining consequently find it easier to hire skilled workers locally.

In theory the Alaska wage rate should be lower, other things being equal, because of

the absence of personal taxes at the state level—income and sales. Likewise the wage

should also be lower if the level of public services is higher. As yet, neither of these

propositions has been tested for the Alaska economy. However, it is possible that

private basic industries can pay a slightly lower wage because there are no general

taxes on workers in Alaska and the level of public amenities is higher.

IV.2.e Offsetting Developments—the Resource Curse There could well be some offsetting factors that would have favored development of

the other natural resource basic industries in Alaska in the absence of petroleum. This

could be the case if the development of petroleum were in competition with some other

resource. The Exxon Valdez oil spill is an example of this phenomenon although it is not

obvious that the fishing industry, in the long run, would be larger in the absence of

petroleum. Another possibility is that the wealth from petroleum has reduced the sense

of urgency surrounding the development of other basic industries in the state. This

symptom of the “resource curse” is hard to measure, but anecdotal evidence suggests it

exists to some degree.


IV.3. Extra Retiree Population

In 2004, 52 thousand retired Alaska seniors, aged 60+, directly contributed $1.461

billion to the Alaska economy by their presence (Appendix D). This is a surprisingly

large amount, considering that Alaska has the smallest share of residents over 65 of

any of the states. Since retirees have the option to live anywhere, their presence in the

state can be viewed as a basic industry or economic driver.

In recent years the share of the 65+ population has been growing at a faster rate

than any other state except Nevada because the number of seniors choosing to stay in

the state after retirement has increased. This is because seniors are finding Alaska

more attractive as a retirement option. We assume that, without the petroleum industry,

the retiree population would be half of its current size, leading to the losses shown in

Table IV.12. The population loss is large because it includes not only the reduction in

employment and the families of those workers but also the retirees themselves who

move elsewhere.

Table IV.12. Impact of Reduction in Retiree Population on Alaska Economy in 2005


Alaska is one of only five states with no state personal income tax. There is also no

statewide sales tax. Homeowners aged 65 and above receive a state-mandated tax

rebate on their local property tax up to the first $150 thousand of taxable value. Excise

taxes, such as on gasoline, are generally quite low compared to other states.

Until recently, every Alaskan aged 65 and above was eligible for the Longevity

Bonus—a program that provided a cash payment of $250 per month to help offset the

high cost of living so that seniors could stay in Alaska. Although that program has been

discontinued, it has been replaced by one that targets needy seniors. All senior

residents are eligible to receive the Alaska Permanent Fund dividend, and the state

provides other benefits for seniors, including support for senior centers.


Another factor contributing to retirees staying in Alaska is that petroleum-driven

economic growth has allowed many of the children of older Alaskans to find jobs in

Alaska. Since retirees often choose to live close to their children, this has increased the

retiree population.

IV.4. Household Tax Advantage

In the absence of petroleum revenues, broad-based taxes on households—personal

income and sales taxes—would be required to fund basic public services. These taxes

would take purchasing power away from households and put it in the public sector.

This shift in the composition of spending would increase employment and personal

income because government spending is labor intensive. That is, the job loss from

increased taxes would fall most heavily on retail trade and services. Retail trade

spending in particular tends to leak outside the state economy quickly. In contrast the

increase in public spending would directly support the employment of teachers and

other public employees.

If taxes on households were to increase to offset 30 percent of the lost petroleum

revenues the increases in employment and personal income would be at the levels

shown in Table IV.13.

Table IV.13. Impact of Increase in Household Tax Burden on Alaska Economy in 2005

Component Loss Employment (000) -12 Population (000) -20 Personal Income (million $) -$591

IV.5. Federal Spending Tied to Population

Federal spending—excluding the Department of Defense, and spending directed

towards retirees--federal retirement, Medicare, and Social Security—can be divided into

4 major categories. Within each category there are some programs that are population

sensitive (see Appendix F). In the absence of a petroleum industry in Alaska, the

population would be considerably smaller today, and federal spending associated with


these programs would be less. We estimate the percent reduction by program would be

as shown in Table IV.14.

Table IV.14. Assumptions For Reduction in Federal Civilian Expenditures by Category

Category Reduction Agencies 25% Transfers (excluding retirement) 25% Grants

Formula 40% Project 10%

Source: Consolidated Federal Funds Report and author estimate.

The reduction of employment and personal income from less federal spending is

shown in Table IV.15.

Table IV.15. Impact of Reduction in Federal Spending on Alaska Economy in 2005


About half of federal employees are in agencies, like the Post Office, that serve the

local population.

Excluding federal retirement, Social Security, and Medicare, most federal transfers

to individuals—like unemployment insurance and food stamps—are population

sensitive.

Almost all formula grants are directed to state government. The largest is Medicaid,

and most are population sensitive. Examples of other large programs are TANF and

CHIP.

Project grants go to nonprofits, including Alaska Native nonprofits, as well as to state

and local governments. We assume that no grants to Native nonprofits would be

reduced since the size of the Alaska Native population is not sensitive to the level of


economic activity in the state. Because many of the large project grants to governments

and other nonprofits are for capital projects, we assume a very small share would be

eliminated.

It is not possible to say how—in the absence of the high level of state funding made

possible by petroleum revenues—federal spending in Alaska would have been different.

It is certainly possible that the level of support in certain areas like development would

have been higher, but since Alaska has enjoyed the highest per capita federal

expenditures of any state for many years, it is unlikely that total spending would have

been higher than it has been.

IV.6 Non-Earned Income Tied to Population

A small flow of money into Alaska comes from foundations, settlements like the

Exxon Valdez court case, and others (See Appendix G.). If Alaska had a smaller

population, this flow would be smaller. We assume that without the petroleum industry,

this flow would be reduced by 50 percent with a resulting loss to the economy as shown

in Table IV.16.

Table IV.16. Impact of Reduction in Private Non Earned Income on Alaska Economy in 2005

Component Loss Employment (000) 3 Population (000) 5 Personal Income (million $) $292


IV.7. Larger Economic Multiplier

Petroleum led economic growth has increased the size of the regional market for

support services (transportation, communications, utilities, trade, business services,

personal services, finance, manufacturing for the local market) leading to economies of

scale and increased competition. The introduction of the petroleum industry has

reduced the overall seasonality of the economy, allowing firms to spread their fixed

costs over a larger market. Petroleum revenues have eased the “tax burden” on support

businesses just as they have on the resource industries and households. Generous

public expenditures have subsidized the costs of development and operation of these

sectors as well. Growth in business infrastructure has contributed to lower costs for all

types of businesses. Growth in the labor supply and the absence of personal taxes have

contributed to reductions in the cost of labor for support businesses as well as

increased purchasing power for consumers.

These developments have increased the size of the economic multiplier as shown in

Figure IV.1where the jobs multiplier (total jobs / basic jobs) is shown as a function of the

number of basic jobs. Over time the number of basic sector jobs has more than

doubled in Alaska and the jobs multiplier has increased from about 1.5 to 2.5.

Figure IV.1. Total Jobs Multiplier as a Function of Basic Plus State and Local Jobs


Without petroleum, growth in the size of the multiplier would have been more

modest. If it were 25 percent smaller in the absence of petroleum, the loss in

employment and personal income would be as shown in Table IV.17.

Table IV.17. Impact of Reduction in Multiplier on Alaska Economy in 2005 Component Loss

Employment (000) 24 Population (000) 42 Personal Income (million $) $1,657

IV.5.a Market Size

As was indicated in Table IV.3, the petroleum industry, through its annual

procurement purchases, supports a wide range of companies providing services in

areas such as communications, construction, transportation, medical, and engineering.

This increases the range of local business services available to industries in the state.

Wholesale trade provides an example. In the early days of statehood, the industry in

Alaska was hampered by high fixed costs combined with small market size and the

added cost of the instability associated with weather and other challenges.

Consequently, there were few local firms, and little equipment, or expertise. Most

activity was handled out of Seattle.12

The demand for wholesale trade services has grown and this has allowed more

firms to establish operations in the state, increasing competition and economies of scale

which in turn has lowered the cost of business for consumers of wholesale trade

services.

The high wages paid by firms in the petroleum industry as well as in government

have increased consumer purchasing power which has also led to an increase in both

12 The Alaska wholesaler is vulnerable to the uncertainties resulting from the fluctuations typical of the state—

seasonality, military spending, transient labor force, and the changing bases of economic development. Higher

warehouse construction costs and the large inventories required by seasonally spotty deliveries impose a heavy initial

financial burden. The wholesaler must assume all these risks, yet depend completely for his business on his state

alone—a small market to begin with. For all these reasons, the Alaska wholesaler has, until lately, been restricted to

high turnover lines (USDC, 1959).


the number and variety of household serving businesses. This means that a larger

share of each dollar of consumer spending remains in Alaska to circulate through the

economy—also reflected in a larger economic multiplier.

IV.5.b Seasonality Seasonal fluctuations create a challenge for businesses because they must spread

their fixed costs over a few months of activity rather than the entire year. It is easier for

a restaurant to be profitable if it can operate at capacity year round than if it is limited to

operating at capacity for only six months and shuts down for the rest of the year. The

only way that would be profitable would be to charge a higher price during the short

season. The result of this situation is that a highly seasonal economy is likely to have a

smaller economic multiplier than one of the same size without seasonal fluctuations

At the time of statehood, the seasonal pattern of activity in commercial fishing and

construction resulted in an economy with a huge influx of workers into the labor market

in the summer, both from Alaskans unemployed during the winter and nonresidents who

temporarily moved into the state for the summer season. Today the economy is much

less seasonal in spite of the growth of commercial fishing and development of a very

seasonal tourist industry (Appendix E).

The decline in seasonality is largely due to the growth in importance of petroleum.

Employment in that industry is not seasonal, and the jobs it supports in government as

well as in support sectors of the economy are also not seasonal. The addition of over

100 thousand non seasonal jobs to the economy has had a significant stabilizing effect.

IV.5.c Cycles Petroleum has a different cyclical pattern than other resource industries. That

pattern has been dominated by the timing of development of large fields, the $900

million lease bonus sale in 1968, the construction of the oil pipeline, and the oil price

fluctuations of the early 1980s and more recently the increase in the oil price. Yet the

industry has demonstrated more long-term stability than originally anticipated. Early

analysts thought that employment would stabilize at a few thousand workers and then

quickly decline after development of those fields identified in the 1970s had began

production. The actual pattern has been one of much more long-term stability that some


other resources. Gold and the crab harvest are examples of two resources that have

been subject to much more cyclical fluctuation, driven not only by price but also, in the

case of crabs, quick depletion of the resource.

Furthermore, the practice of the large oil companies has been to maintain relatively

constant employment and contract out for services when needed, so that cyclical

fluctuations have tended to be concentrated among service companies, some of whom

are nonresident. The size of the large firms have allowed them to do this, weathering

the cycles compared to firms in the seafood, mining, and tourism industries which do

not have such large financial resources.

IV.5.d General State Expenditure Bonus Since 1975 petroleum revenues have allowed state government expenditures to

consistently exceed the per capita average of other states. In Appendix B we estimate

that the general fund “expenditure bonus” has amounted to about $51 billion (2008 $)

out of total state petroleum revenues of $141 billion through 2008. This “expenditure

bonus” has been spent on operations, infrastructure, and fund capitalization—some of

which has been directly targeted to lower development and operating costs for the

private support sectors of the economy. For example, the Alaska Industrial

Development and Export Authority has provided financial assistance to numerous

Alaska businesses involved in trade and services targeting the Alaska market.

IV.5.e Cost of Business In the same way that petroleum has expanded the range of business services

available locally, it has increased the size and skill level of the labor supply. Support

businesses consequently find it easier to hire skilled workers locally.

In theory the Alaska wage rate should be lower, other things being equal, because of

the absence of personal taxes at the state level—income and sales. Likewise the wage

should also be lower if the level of public services is higher. As yet, neither of these

propositions has been tested for the Alaska economy. However, it is possible that

support industries can pay a slightly lower wage because there are no general taxes on

workers in Alaska and the level of public amenities is relatively high.


IV.5.f Petroleum Product Prices The development of natural gas in Cook Inlet has for many years made natural gas

for heating and electrical generation in south central Alaska much cheaper than in the

rest of the United States. These low prices have benefited businesses through lower

costs of doing business and consumers by increasing their purchasing power.


V. Alaska Today Without Petroleum: The Road not Taken

Taken together, the result of stripping away from the 2005 Alaska economy all of the

effects of petroleum described in the previous section, is to cut 171 thousand jobs and

$12 billion in personal income from the economy. This also results in an estimate of a

loss of population of 317 thousand (Table V.1).

Table V.1. Summary of Reductions without Petroleum 2005

Employment (000)

Population (000)

Personal Income

(million $) Petroleum production (including state and local revenues)

105 179 $6,941

Spillover benefits to other private sector economic drivers 24 42 $1,157

Extra retiree population 10 44 $1,102 Household tax advantage -12 -20 -$591 Federal spending tied to higher population 16 27 $1,386

Unearned income tied to higher population 3 5 $292

Larger economic multiplier 24 42 $1,657

TOTAL 171 317 $11,944

These cuts reduce the size of the economy by half (Table V.2).


Table V.2. The Cumulative Reductions in 2005

Employment (000)

Population (000)

Personal Income

(million $) ACTUAL 2005 361 660 $24,127

Petroleum production (including state and local revenues) 256 481 $17,186

Spillover benefits to other private sector economic drivers 231 440 $16,030

Extra retiree population 221 396 $14,927 Household tax advantage 233 416 $15,518 Federal spending tied to higher population 217 390 $14,132

Unearned income tied to higher population 214 385 $13,840

Larger economic multiplier 190 343 $12,183

NO PETROLEUM 2005 190 343 $12,183 ITEM: % REMAINING WITHOUT PETROLEUM 53% 52% 50%

The reductions do not fall equally across the different economic drivers (Table V.3).

Table V.3. Employment by Driver With and Without Cuts in 2005 (000)

No Petroleum Actual Difference TOTAL 190 361 171

FEDERAL 114 136 22 National Defense 62 72 2 Non Defense 52 64 20

PETROLEUM 105 105 Production 45 45 Permanent Fund & CBR 10 10 State/Local Revenues 50 50

TRADITONAL RESOURCES 30 43 13 Seafood 22 32 9 Mining 6 9 3 Timber 1 2 1 Agriculture 0 0 0

NEW DRIVERS 33 49 17 Tourism 29 42 13 Air Cargo 4 7 4 Other Mfg and Services 0 0 0

PERSONAL ASSETS 13 27 13 Retirees 10 21 10 Non-Earned Income 3 6 3


The economic structure looks very different without petroleum (Figures V.1 and

V.2).

Figure V.1. Total Jobs in 2005: No Petroleum

Figure V.2. Total Jobs in 2005: Actual

Detail for the non-petroleum economy by economic driver is shown in Table V.4. The

federal government is responsible for 60 percent of total employment. The traditional

natural resource economic drivers of seafood, mining, timber, and agriculture account


for 16 percent. New economic drivers (primarily tourism), retirees, and external earnings

account for the remaining 24 percent.

Because of the composition of employment with seafood and tourism making up a

larger share of the total, the economy is much more seasonal.

Table V.4. The Structure of the Economy Without Petroleum in 2005 Alaska Employment by

Place of Work Alaska Resident Personal Income

Thousand Share Billion $ Share

TOTAL 190 100% $12,183 100% FEDERAL 114 60% $7,960 65%

National Defense 62 32% $3,468 28% Civilian 52 27% $4,492 37%

PETROLEUM Production State/Local Revenues Permanent Fund & CBR

TRADITIONAL RESOURCES 30 16% $1,270 10% Seafood 22 12% $813 7% Mining 6 3% $386 3% Timber 1 1% $72 1% Agriculture 0 0% $0 0%

NEW DRIVERS 33 18% $1,524 13% Tourism 29 15% $1,275 10% Air Cargo 4 2% $212 2% Other Mfg and Services 1 0% $37 0%

PERSONAL ASSETS 13 7% $1,430 12% Retirees 10 5% $1,114 9% Non-Earned Income 3 2% $315 3%

The composition of the population is also very different (Table V.5).

Table V.5. Alaska Population Without Petroleum: 2005 Actual Loss Remaining Percent

Remaining Population 660 -317 343 52% Civilian Non Native 480 -317 163 34% Alaska Native 120 0 120 100% Military, including Dependents 60 0 60 100%

The economic and demographic structure without petroleum describes a very

different Alaska politically and culturally that we live in today. This analysis has

investigated an alternative growth path that only considers economic factors. But in the


absence of petroleum there would have been other important differences in the

institutional, political, and cultural history of the state. Would the Alaska Native Claims

Settlement Act have been passed? Would the rural areas have survived in their present

form? These differences would have also impacted the economic development of the

state. There are many fascinating questions to ponder as part of this Gedanken

experiment. However it is clear that the economy would have been much smaller and

more fragile than it is today.


References

Fried, Neal, and Windisch-Cole, Brigitta. “The Oil Industry”. Alaska Economic

Trends, Alaska Department of Labor, September 2003.

Fried, Neal. “Alaska’s Oil Industry”. Alaska Economic Trends, Alaska Department

of Labor, September 2008.

Goldsmith, Scott. “Structural Analysis of the Alaska Economy: What are the

Drivers?”, Institute of Social and Economic Research, 2008.

Information Insights and the McDowell Group, Economic Impact of the Oil and

Gas Industry on Alaska. For the Alaska Oil and Gas Association and The Alaska

Support Industry Alliance, 2001.

Information Insights and the McDowell Group, The Role of the Oil and Gas

Industry in Alaska’s Economy. For the Alaska Oil and Gas Association, 2008.

Knapp, Gunnar. “Alaska Salmon Ranching: an Economic Review of the Alaska

Salmon Hatchery Programme”, in Stock Enhancement and Sea Ranching, ed. Bari

Howell, Erlend Moksness, and Terje Svasand, Blackwell Science Ltd., Oxford, 1999.

McDowell Group, Economic and Social Effects of the Oil Industry in Alaska 1975

to 1995, for US Department of the Interior, Minerals Management Service, Alaska Outer

Continental Shelf Region, OCS Study MMS 99-0041.

Rogers, George and Cooley, Richard, Alaska’s Population and Economy:

Regional Growth, Development, and Future Outlook-Volumes 1 and 2, Institute of

Economic and Government Research, University of Alaska, College Alaska, 1963.


Rogers, George. “Alaska’s Economy in the 1960’s”, in Alaska Public Policy:

Current Problems and Issues, ed. Gordon Harrison, Institute of Social and Economic

Research, College Alaska, 1971.

Rogers, George. “International Petroleum and the Economic Future of Alaska”, in

Alaska Public Policy: Current Problems and Issues, ed. Gordon Harrison, Institute of

Social and Economic Research, College Alaska, 1971.

Tuck, Bradford. “Petroleum Industry Expansion in Alaska and Structural

Change”, for the Alaska Outer Continental Shelf Leasing Office, 1982.

Tussing, Arlon R. “Alaska’s Petroleum-Based Economy”, in Alaska Resources

Development: Issues fo the 1980s, ed. Tom Morehouse, Westview Press, Boulder,

Colorado, 1984.

ISER / The Importance of Petroleum A-1 November 2009

Appendix A

The No Oil “Tax Burden” on Alaska Basic Industries

Without petroleum revenues, the burden for paying for public services in Alaska

would fall more heavily on households and businesses, and particularly on those

economic drivers, or basic sectors, upon which economic growth depends—seafood,

mining, and tourism. We speculate that the tax burden on the seafood, mining, tourism,

and timber industries would need to increase by 200 to 400 percent.

Since 1970, the first year of significant petroleum revenues, state government

general fund expenditures per capita have always exceeded $4 thousand (Figure A.1).

Figure A.1 Alaska General Fund Appropriations: Real Per Capita (2007$)

Source: Alaska Legislative Finance.

In the absence of petroleum we have argued that the economy would be about half

its current size today, or about 300 thousand. At that population level, a state general

fund budget that delivered the minimum in real per capital expenditures of $4 thousand

would be $1.2 billion. Revenues from existing non petroleum sources would logically be

less than their current actual level because of the smaller economy. With the current

tax regime revenues from seafood, mining, tourism, and timber might be $80 million

since activity in those sectors would be smaller. Other revenues (corporate income tax,


various excise taxes, and miscellaneous revenues) would also be less—perhaps $150

million.

Taxes on households might average $1.75 thousand per capita with the imposition

of a personal income tax and a general sales tax and thus generate $525 million13. This

would leave a shortfall of $445 million. Table A.1 compares this No Petroleum Budget

with the actual 2005 state general fund budget.

Table A.1 2004 Alaska General Fund Budget (Million 2007$)

No Petroleum

Alaska

Actual 2005

Population (000) 300 663 Expenditures $1,200 $3,268 Sources of Funding

Petroleum Revenues $2,904 Other Revenues Current Taxes $230 $364

Seafood, Tourism, Mining, Timber $80 $112 Other $150 $252

New Personal Income and Sales Taxes $525 Shortfall $445

In 2005 the seafood, mining, tourism and timber contributed $139 million to state

and local revenues in Alaska of which an estimated $112 million was paid into the

general fund. Table A.2 shows that revenues from these sources was much higher in

2006 and 2007, however much of that increase is attributable to the unusually high

commodity prices of those years and does not reflect an upward trend. This is also

reflected in the increase in state petroleum revenues during those years. It is likely that

state general fund revenues from these non petroleum resources will return to a level

between $100 and $200 million annually in years to come. If asked to pay the shortfall

calculated in Table A.1, the tax burden on these industries would increase between 200

and 400 percent.

13 In 2006 the national average per capita state and local income tax collection was about $900 and

the national average general sales tax collection was $750 according to the Tax Foundation.


Table A.2 2004 General Fund Budget: Approximate Revenues from Selected Basic Sectors of the Economy

(Million 2007$) 2005 2006 2007 Non Petroleum

Resources $139 $188 $309

Seafood $74 $89 $79 Tourism $50 $53 $51 Mining $13 $45 $178 Timber $2 $1 $1

Petroleum $3,331 $4,359 $5,154 Source: Alaska Department of Commerce, Community, and Economic Development.

Looking backward from 2005, the shortfall would have been somewhat smaller on

average, but the activity level in the non petroleum basic sectors would also have been

lower in earlier years. Consequently the 2005 estimate of an increase of 200 to 400

percent in the tax burden on these industries seems reasonable for earlier years as

well.

ISER / The Importance of Petroleum B-1 November 2009

Appendix B

State Petroleum Revenues—Tax Relief vs. Extra Expenditures

From the time Alaska became a state through 2008, the state collected $140.6

billion (2008 $) in petroleum revenues (83 percent) and $29.8 billion in other general

fund revenues (17 percent) for a grant total of $170.4 billion. All non petroleum general

fund revenues were spent as well as $117 billion of petroleum revenues for a spending

grand total of $146.8 billion (through the state general fund). The remaining $23.6

billion in petroleum revenues has been saved in the Alaska Permanent Fund (spending

of principal prohibited by the Constitution) and the Constitutional Budget Reserve

(available for appropriation).

Table B.1 Sources and Uses of State Revenues: 1959-2008 (Billion 2008 $)

SOURCES USES GF Spend $146.8

Petroleum $140.6 Petroleum $117.0 Other $29.8 Other $29.8

Save--PF and CBR $23.6

TOTAL $170.4 TOTAL $170.4

Total petroleum revenues in turn can be divided among three categories—saved,

appropriated for tax relief, and appropriated for “extra” expenditures. (Table B.2).

Table B.2. Apparent Use of State Petroleum Revenues: 1959-2008 (Billion 2008 $)

TOTAL $140.6 Direct Savings $23.6 17% Appropriations $117.0 83% Tax Relief $51.4 37%

Households $32.3 23% Businesses $19.2 14%

Extra Appropriations $65.6 47%

Tax relief of $51.4 billion was shared between households and businesses. For

households this represents the estimated personal income taxes and state general


sales taxes that actual Alaska households would have paid since 1981 when the

personal income tax was repealed. (Alaska has never had a state general sales tax.)

For businesses, it represents the revenues they saved by not having to pay the

difference between expenditures at the level of $4 thousand per capita and other

revenue sources (See Appendix A.)

Extra appropriations of $65.6 billion represent the benefits from spending at a level

higher than $4 thousand per capita. These appropriations increased the size of both the

operating and capital budgets, provided for the creation of several loan programs, and

included other savings of $11.3 billion.

This other savings of $11.3 billion consisted of appropriations to the Alaska

Permanent Fund over and above those required by the Constitution. Taking into

account that additional savings, the final disposition of petroleum revenues from

statehood though 2008 is shown in Table B.3. Total savings has been 27 percent.

Actual spending has been evenly divided between tax relief and extra spending.

Table B.3 Actual Uses of State Petroleum Revenues: 1959-2008 (Billion 2008 $)

TOTAL $140.6 Total Savings $37.9 27% Permanent Fund $26.6 19% Direct Savings $15.3 11% Appropriated $11.3 8% Const Budget Reserve $8.2 6% Total Spending $102.7 73% Tax Relief $51.4 37.

Households $32.3 23% Businesses $19.2 14%

Extra Spending $51.3 37%

Another way to get a sense of how petroleum revenues allowed the state to expand

appropriations is to compare outlays in Alaska to other states using the U.S. Census of

Governments State and Local finance series. The extent to which Alaska exceeds the

U.S. average is a measure of the extra appropriations the state has made from

petroleum revenues.


Figure B.1 shows the historical pattern of real per capita government outlays (state

and local combined) from own sources (excluding federal grants and for Alaska also

excluding the permanent fund dividend payments). The data are adjusted by per capita

personal income, which serves as a proxy for differences across states in the cost of

living. Alaska is the line consistently above the other states since shortly after

statehood.

Figure B.1 Real Per Capita State and Local Government Outlays by State

The Alaska differential can be more easily identified by taking the ratio of the Alaska

per capita figure to the U.S. average, which is shown in Figure B.2.


Figure B.2 Ratio: Alaska to U.S. Average Real Per Capita State and Local Government Outlays

The clear difference in the pattern before and after 1975 underscores the fact that

spending increased dramatically after the petroleum revenues from North Slope

production began to fill the state treasury. (The local peak in the early 1970’s came from

spending the bonus revenues on North Slope leases received in 1970.).

Government outlays as a share of personal income is another way to demonstrate

that Alaska has been able to increase its public expenditures because of petroleum

revenues. Figure B.3, which compares states, shows that Alaska (the highest line) has

consistently been able to spend a larger amount in relation to personal income than any

other state.


Figure B.3 Outlays as a Share of Personal Income

ISER / The Importance of Petroleum C-1 November 2009

Appendix C

Detailed Analysis of State Spending

A comprehensive review of state spending and in particular the composition of the

extra spending made possible by petroleum revenues, is beyond the scope of this

paper. However a couple of examples will show that the extra spending bought a wide

range of additional public services and physical infrastructure, and impacted every

region of the state through both state and local government spending.

Table C.1 for example shows that expanded activity between 1975 and 1995

administered by the Department of Commerce and Economic Development was spread

across the natural resource industries (seafood, mining, and tourism), small business in

general, and households (child care).

Table C.1 Cumulative Loan Originations by Program 1975-1995, Dept of Commerce and Economic Development, Division of

Investments (1995 million $) TOTAL $1,691

Veterans $612 Commercial Fishing $406 Small Business $404 Fisheries Enhancement $127 Tourism $51 Mining $33 Alternative Energy $24 Bulk Fuel $12 Residential Energy Conservation $11 Water Resources $5 Child Care $3 Historical Districts $2 Small Business Economic Development $1

Source: McDowell, 1999.

Table C.2 shows the pattern of state general fund capital appropriations between

1980 and 1995, demonstrating both the range of programs and the rapid growth in

some categories. Energy, water and sewer, and roads have been both large and

rapidly growing categories.


Table C. 2 Annual Average General Fund Capital Appropriations 1980-1995 (Thousand 1995 $) Ranked by program expansion After Oil Revenues

Category Average Annual

Spending

Rank Among Categories in

Spending Growth Over Prior

5 Year Period TOTAL $645,046 4.30

GREATER THAN THE AVERAGE Natural Resources $1,452 36 Infinite Hospitals $7,059 20 1,103.0 Native and Cultural $382 43 212.3 Flood and Erosion Control $5,981 22 168.0 Pollution and Litter Control $831 41 51.3 Forestry $2,571 31 43.3 Mining $987 38 32.5 Other Public Safety $973 39 22.4 Water & Sewer $60,699 4 21.0 Other Transportation $8,822 17 19.6 Fire Safety $4,621 25 15.4 EMS $1,495 35 13.4 Environmental $3,551 27 12.8 Youth & Family Services $5,534 23 12.7 Courts & Legal $7,792 19 12.5 Energy $138,409 1 11.9 Libraries $1,712 34 9.7 Housing $16,089 10 9.1 Unassigned $16,440 9 9.0 Senior Care $9,889 14 8.9 Aviation $19,917 8 8.1 Community Assistance $21,975 6 6.2 Police & Corrections $13,548 11 6.2 Historic Preservation $792 40 5.4 Economic Development $11,859 13 5.2 Roads $89,127 3 4.9 Other Social Services $3,259 28 4.8 Medical & Health Care $9,183 15 4.4 LESS THAN THE AVERAGE Parks & Recreation $12,951 12 4.2 Museums $1,155 37 4.0 Military $2,183 33 3.8 Oil & Gas $717 42 3.8 University of Alaska (UA) $30,761 5 3.8 Other Natural Resources $2,217 32 3.6 Marine Highway System $7,617 18 3.2 Docks & Harbors $19,491 7 2.7 Fish & Game $8,213 16 2.2 Lands $5,931 21 2.2 Agriculture $4,309 24 1.8 K-12 Education $79,362 2 1.5


Category Average Annual

Spending

Rank Among Categories in

Spending Growth Over Prior

5 Year Period Legislative $153 44 1.0 Other Training & Education $2,050 30 0.9 Other $1,546 29 0.3 Public Communications $1,810 26 0.3 Employee Compensation $7 45 Permanent Fund -$364 46

Source: McDowell, 1999

If we look at capital spending targeting a rural area, the Northwest Arctic Borough,

we see considerable spending considering the population of the region (Table C.3).

Over the entire period 1975-1995, the largest expenditures were for education, water

and sewer, and aviation. Prior to 1980, essentially all spending targeting this region

was for education.

Table C.3 Total State GF Capital Appropriations for Northwest Arctic Borough 1975-1995 (thousand 1995$)

TOTAL $235,451 K-12 Education $77,596 33% Water and Sewer $41,877 18% Aviation $22,457 10% Community assistance $14,664 6% Energy $11,680 5% Flood and erosion control $10,606 5% Roads $7,709 3% Youth and Family Services $5,632 2% Agriculture $5,120 2% Senior Care $5,062 2% Military $4,915 2% Economic Development $4,710 2% Pollution and Litter Control $4,033 2% Fire Safety $2,851 1% Unassigned $2,673 1% Police and Corrections $2,159 1% Other Social Services $2,146 1% Docks and harbors $1,320 1% Other Public Safety $1,300 1% EMS $1,060 0% Other $5,881

Source: McDowell, 1999.

ISER / The Importance of Petroleum D-1 November 2009

Appendix D

Retirees

Retirees are free to live wherever they choose, so those who reside in Alaska

represent one of our basic (footloose) industries. The retiree cash flow comes primarily

from retirement income and third-party health-care spending, with a small amount

contributed from non-health-related federal funds targeting seniors.

In 2004, 52 thousand retired Alaska seniors, aged 60 and over, directly contributed

$1.5 billion to the Alaska economy by their presence. The cash flow was equal to about

$28 thousand for the average retired senior.

Table D.1 Cash Flow to Alaska in 2004 from Retired Seniors 60+

Total (Million $) Per Capita Total $1,461 $28,167

Retirement Income $1,139 $21,947 Health Care $302 $5,821 Other $21 $400

The majority of this contribution, more than $1.1 billion, was composed of retirement

income from Social Security, public retirement accounts, private pensions, and income

from accumulated assets. Some personal income from Social Security, retirement

accounts, pensions, and other assets is paid to people under the age of 60, and some

goes to people older than 60 who are not retired. We include here only the share of

income from these sources paid to Alaskans aged 60+ who are retired Table D.2).


Table D.2 Cash Flow to Alaska in 2004 from Senior Retirement Income (million $)

60+ Retirees 60+ Total Total Paid to Alaskans

TOTAL $1,138 $1,344 $1,803 FEDERAL $589 $683 $915

Social Security $392 $461 $461 Federal Civilian Retirement $95 $112 $172 Federal Military Retirement $48 $57 $174 Veteran Compensation $54 $54 $108

STATE-LOCAL $265 $311 $489 Public Employee Retirement System (PERS) $148 $174 $287

Teachers’ Retirement System (TRS) $113 $133 $197

Other Retirement $4 $5 $5 PRIVATE $285 $350 $400

Pensions $135 $150 $200 Investment Income $150 $200 $200

The other large component of money flowing into Alaska due to the presence of the

retired senior population is health-care spending for seniors from both public and private

sources. This totaled $302 million, an average of $5,821 for each retired senior. Federal

Medicare and Medicaid payments together accounted for about 75% of health-related

dollars (including long-term care). The rest was insurance payments associated with

private and public retirement programs. The total of $302 million is less than the total

amount of spending on health care for these seniors. It excludes self-paid health

insurance, out-of-pocket expenditures by retired seniors for health care, and state

government spending on senior health care (the state shares in the cost of the Medicaid

program).


Table D.3 Cash Flow to Alaska in 2004 from Spending for Senior Health Care (million $)

TOTAL $302 Medicare $167 Federal Share of Medicaid $71

Nursing Homes $26 Waivers $13 Personal Care $19 Dual Eligibles $12

State Public Employee $33 Federal Public Employee $12 Private Retirement Plan Insurance

$19

In addition to retirement income and health-care spending, small amounts of cash flow

into the state from federal programs for low-income Alaskans, including some seniors.

These totaled about $21 million in 2004. There are also a number of federal grant

programs that target seniors, but the dollar amount of these grants is not directly related

to the size of the senior retiree population. One cannot assume that the flow of dollars into

the economy from these grant programs would increase if the senior retiree population

were to grow.

Table D.4 Cash Flow to Alaska from Other Federal Programs Benefiting Seniors, 2004

(million $) Federal Programs for Low-Income Seniors $21

Social Security (SSI) $16 Food Stamps $5

A large share of the income associated with retirees comes from the federal

government. We avoid double counting these dollars by netting them out of the analysis

of the contribution of federal spending in Alaska.

ISER / The Importance of Petroleum E-1 November 2009

Appendix E

Seasonality of the Alaska Economy

Table E.1 summarizes the seasonality of Alaska wage and salary employment

(augmented by fish harvestors) by comparing the ratio of July to January employment.

Employment was 16 percent higher in the summer of 2006, resulting in a seasonal

increase of 49 thousand workers. Seasonality varied considerably by industry, with

timber harvesting, commercial fishing (harvesting and processing), tourism related, water

transportation, and construction reflecting the most seasonality. In this presentation the

seasonality of tourism is under stated since its impact on the industries it influences

cannot be separated from the demand generated by residents. Almost all tourist visitors

to Alaska come in the summer, so the true seasonality of that sector is better reflected by

a ratio closer to 10.

Seasonality in the petroleum industry is close to the average for all wage and salary

employment, and considerably less than the private sector average. Government

employment, dominated by state and local government and largely financed by petroleum

revenues has a ratio less than 1 because of the seasonal pattern of education

employment.

Table E.1 Seasonality of Alaska Wage and Salary Employment: 2006

Employment

January July Ratio Seasonal Increase

Total 299,799 349,218 1.16 49,419 Wage and Salary 292,499 329,018 1.12 36,519 Fish Harvesters 7,300 20,200 2.77 12,900

Government (excluding military) 78,991 66,228 0.84 (12,763)

Private 220,808 282,990 1.28 62,182

Seafood 14,632 38,370 2.62 23,738 Harvesting 7,300 20,200 2.77 12,900 Processing 7,332 18,170 2.48 10,838

Tourism Related 25,486 41,993 1.65 16,507


Eating and Drinking 16,569 21,806 1.32 5,237 Hotels 5,776 11,687 2.02 5,911 Travel Agents, Reservations 497 1,433 2.88 936 Scenic Transport 501 3,808 7.60 3,307 Other Amusement 2,143 3,259 1.52 1,116

Mining 1,582 1,872 1.18 290 Petroleum 9,442 10,627 1.13 1,185 Timber Harvest 162 470 2.90 308 Construction 14,450 21,373 1.48 6,923 Water Transportation 653 981 1.50 328 All Other Private 154,401 167,304 1.08 12,903

If the military and self employed are included in the picture, the seasonality ratio of the

economy declines, to 1.11. Although there is some seasonality in the military associated

with summer exercises, specific data on the numbers is not available. Proprietors

(excluding fish harvestors) is assumed to have the same seasonal pattern as private

employment excluding natural resources (with tourism), construction, and water

transportation.

Table E.2 Seasonality of Total Alaska Employment: 2006

Employment


TOTAL EMPLOYMENT 341,309 379,702 1.11 38,392 Wage and Salary (including

Fish Harvesters) 299,799 349,218 1.16 49,419 Net Seafood, Tourism,

Construction 257,641 257,588 1.00 (53) Seafood 14,632 38,370 2.62 23,738 Tourism (Hotels) 5,776 11,687 2.02 5,911 Construction 14,450 21,373 1.48 6,923

Military 26,394 26,394 1.00 0 Proprietors (excluding Fish Harvestors) 22,416 24,290 1.08 1,873

ITEM: Subtotal for Seafood, Tourism, Construction, and Military 61,252 97,824 1.60 36,572


The largest non petroleum private sector economic drivers of seafood and tourism

have a combined ratio over 2, and if the federal government is included, the ratio falls to

about 1.5.

At the time of statehood, the seasonality ratio was 1.21.

Table E.3 Seasonality of Total Alaska Employment: 1959

Employment


TOTAL EMPLOYMENT 82,482 99,517 1.21 17,035 Wage and Salary (including

Fish Harvesters) 45,697 65,472 1.43 19,775 Net Seafood, Tourism,

Construction 39,826 43,693 1.10 3,867 Seafood 1,280 9,060 7.08 7,780 Tourism (Hotels) 458 741 1.62 283 Construction 3,493 7,448 2.13 3,955

Military 32,000 32,000 1.00 0 Proprietors (excluding Fish Harvestors) 5,425 6,575 1.21 1,150

ITEM: Subtotal for Seafood, Tourism, Construction, and Military 37,231 49,249 1.32 12,018

It is not possible to determine exactly what share of the decline in seasonality between

1959 and 2006 is attributable to factors other than the growth and influence of petroleum.

Although some is due to declines in seasonality in seafood and construction which has

increased in size but are now more evenly spread across the year, this seems to be more

than offset by growth in tourism which continues to be highly seasonal. Consequently the

seasonality ratio for the largest non-petroleum basic industries actually increased

between 1959 and 2006, suggesting that the economy today without petroleum might be

more seasonal than it was in 1959.

This is reflected in the current seasonal patterns of employment in different regions of

Alaska dominated by different individual economic activities.


Table E.4 Seasonality of Selected Alaska Regional Economies: 2006

Dominant Driver

Census Area

Ratio July/January

Wage & Salary Employment

Petroleum North Slope Borough 1.1

State-Local Government Bethel 1.0

Consumer Spending

Matanuska Susitna Borough

1.1

Seafood Bristol Bay Borough 7.1

Tourism Denali 4.3

ISER / The Importance of Petroleum F-1 November 2009

Appendix F

Civilian Federal Spending in Alaska

Each of the four categories of civilian federal spending in Alaska has a different

sensitivity to population. The first category of civilian federal spending in Alaska is

agency spending. The most important departments are shown in Table F.1 with those

most obviously dependent on population highlighted. Although the level of activity in

some agencies, particularly within the Department of Interior are based on the

management of public lands, at least 50 percent of employment is population sensitive.

Table F.1 Nondefense Federal Employment in Alaska by Department, 2000

Number Share TOTAL 10,396

Interior 2,325 22% Postal Service 2,185 21% Transportation (FAA) 1,615 16% Agriculture (Forest Service) 1,139 11% Health and Human Services (HHS) 957 9% Commerce 961 9% Veterans’ Administration 440 4% Treasury 234 2% Justice 215 2% U.S. Courts 140 1% All Other 185 2%

Source: Alaska Economic Trends, February 2002. Excludes the Department of Defense civilian employees

The most important transfer programs (direct payments) measured by dollars are

Social Security, federal-civilian retirement, and health-related programs like Medicare.

Excluding payments to retirees, about 50 percent of transfers, as shown in bold in Table

F.2, are population sensitive.


Table F.2 Nondefense Federal Transfers in Alaska, 2004

Amount (million $) Share TOTAL $1,625 Retirement/Disability Payments to Individuals $960 59%

Social Security $663 41% Civilian Retirement $153 9% Veterans Disability Compensation $99 6% Other $45 3%

Direct Payments to Individuals $516 32% Medicare $232 14% Unemployment Compensation $142 9% Food Stamps $64 4% Excess Earned Income Tax Credits $51 3% Other $26 2%

Direct Payments to Others $150 9% Tribal Self Governance $70 4% Temporary State Fiscal Relief Fund $25 2% Other $54 3%

Source: Consolidated Federal Funds Report, 2004.

Almost all formula grants went to state government (94%) with most of the rest going

to local governments and school districts (5%). The largest were Medicaid and highway

planning and assistance. A list of the largest grants (Table F.3) suggest that most are

somewhat population sensitive.


Table F.3 Largest Formula Grant Programs in Alaska: 2002 (Million $)

Total $1,595 Medical Assistance Program (Medicaid) $500 Highway Planning and Construction $401 Impact Aid for Maintenance and Operations of Schools $103 Temporary Assistance for Needy Families $68 State Children's Insurance Program (CHIP) $46 Federal Transit-Capital Investment Grants $45 Federal Transit Formula Grants $31 Title I Grants to Local Education Agencies $24 Unemployment Insurance $23 Special Education–Grants to States $22 Special Supplemental Food Program for Women, Infants, and Children $20 National School Lunch Program $19 Child Care Mandatory and Matching Funds of the Child Care and Development Fund $16 Coastal Zone Management Administration Awards $14 Adoption Assistance $12 Foster Care Title IV E $11 Low Income Home Energy Assistance $11 WIA Dislocated Workers $11 Child Care and Development Block Grant $10 Indian Education–Grants to Local Educational Agencies $10 Child Support Enforcement $10 21st Century Community Learning Centers $9 Rehabilitation Services–Vocational Rehabilitation Grants to States $8 Capitalization Grants for Drinking Water State Revolving Fund $8 Capitalization Grants for State Revolving Funds $8 State Administrative Matching Grants for Food Stamp Program $8 Migrant Education Program–State Grant Program $7 Child and Adult Care Food Program $7 Employment Service $6 School Renovation Grants $6 Special Programs for the Aging–Title III, Part C–Nutrition Services $6 All Other Programs $116

Source: Consolidated Federal Funds Reports

A detailed listing of project grants shows not only the large number but also the great

variety of programs funded by federal grants (Table F.4) as well as the variety of

recipients (Table F.5). The largest project grant programs are the Indian Health Services

and the airport improvement program. Although the former is sensitive to the size of the

Alaska Native population, the Native community has not historically moved interstate in


response to shifting economic opportunities. As indicated by the bolded projects, only a

small share of project grant funding is directly population sensitive, although much of it is

sensitive to the number of communities within Alaska.

F.4 Largest Project Grant Programs in Alaska: 2002 (Million $)


Total $1,534 Indian Health Services Health Management Development Program $674 Airport Improvement Program $124 Special Purpose $47 Administration for Children and Families–Head Start $35 Pacific Coast Salmon Recovery–Pacific Salmon Treaty Program $32 Section 8 Housing Choice Vouchers $31 National Guard Military Operations and Maintenance Projects $29 Water and Waste Disposal System for Rural Communities $28 Assistance to High Energy Cost Rural Communities $25 Interior Dept–Shared Revenues with States (includes Mineral Leasing Act) $25 Community Facilities Loans and Grants $24 Community Health Centers $22 Polar Programs $18 Fund for the Improvement of Education $17 Indian Environmental General Assistance Program $15 Native American Program $14 Improving Teacher Quality State Grants $14 Alaska Native Educational Program $13 Unallied Science Program $13 Renewable Energy Research and Development $12 Marine Mammal Data Program $11 Fossil Energy Research and Development $9 Employment and Training Administration Pilots, Demos, and Research $9 Byrne Memorial State and Local Law Enforcement Assistance Discretionary Grant $9 Consolidated Knowledge Development and Application Program $8 Public Safety and Community Policing Grants $7 Community Services Block Grant–Discretionary Awards $7 Special Program for the Aging–Title VI, Part A, Indian Program $6 Research Centers in Minority Institutions $6 Youth Opportunity Grants $6 Corporation for Public Broadcasting–Grants $6 Fishery Management Councils $6 Performance Partnership $5 Economic Development–Grants for Public Works and Dev Facilities $5 Econ Development Assistance–Sudden Economic Dislocation $5 Congressionally Identified Construction Projects $5 Comprehensive Community Mental Health–Children/ Serious Emotional Disturbances $5 All Others $204

Source: Consolidated Federal Funds Reports.

*Data from the CFFR is considerably higher than reported by the Alaska Indian Health Service in 2002.


F.5 Project Grant Recipients in 2002

Million Dollars Share TOTAL $1,416

Tribal Government $657 46% State Government $291 21% Other Nonprofits $223 16% Local Government $219 15% Universities $56 4%

Source: Federal Assistance Awards Data System. Total is less than reported by CFFR because it excludes a small other category and definitions are slightly different.

.

ISER / The Importance of Petroleum G-1 November 2009

Appendix G

MISCELLANEOUS NON-EARNED INCOME

Some economic activity in Alaska is generated by the purchasing power that flows into

the state that is not directly related to current production of goods and services in Alaska.

There are a number of sources for this non-earned income. (The flows of income from the

Permanent Fund and retiree assets both fall in this category, but they are accounted for

separately because of their magnitude and clearly identifiable sources.)

An estimate of the size of non-earned income is the Dividends-Interest-Rent

component of personal income, which in 2006 for Alaska was $3.4 billion.

However the median U.S. household net worth in 2000 was $55 thousand (Table G.1).

Assuming Alaska is close to the median, that would suggest that the total value of assets

held by Alaskans was about $35 billion. About half of household net worth is held in

financial assets and real estate that produces dividends, interest, or rent with the rest

consisting of housing, vehicles and retirement accounts. This suggests a much smaller

annual flow of Dividends-Interest-Rent to Alaskans than the data from the personal

income accounts.

Table G.1 Asset Ownership in the U.S. in 2000

Percent

Households Owning

Percent of Household Net Worth

ALL ASSETS 100% Own Home 67.2 32.3% Stocks and Mutual Funds 27.1 15.6% 401K and Thrift Savings Plans 29.9 9.7% Interest Earnings Assets at Financial Institutions 65.0 8.9%

IRA and Keogh Accounts 23.1 8.6% Business or Profession 10.8 7.7% Vehicles 85.5 3.7% Rental Property 4.9 3.7% Other Real Estate 6.6 3.6% Other Interest Earning Assets 3.3 1.7% Other 3.9 1.6% U.S. Savings Bonds 14.7 .5% Regular Checking Accounts 37.5 .3% Unsecured Liabilities 52.7 -3%


Source: USDC Bureau of the Census.

We assumed, for determining the importance of non earned income as an economic

driver, a figure of only 10 percent (net) Dividends-Interest-Rent was generated outside the

state and consequently represented new money coming into the economy independent of

other economic drivers.

One modest but stable source consists of the dividends, interest, and rents earned by

Alaskan households on their assets held outside the state. These assets consist of things

like ownership shares in corporations, bonds, and real estate. Of course, a large share of

the non-earned income of Alaskan households comes from Alaska assets, and this

income should be attributed to the basic sector where it is earned. For example, if an

Alaskan household owns stock in an oil company operating in the state, the purchasing

power of the dividends paid to that household should be attributed to the petroleum

sector. (Since the portion of this oil company stock owned by Alaskans is small, we can

effectively ignore it when considering the importance of the petroleum industry within the

state.) Rent earned on a retail mall should be attributed to non-basic activity.

The largest asset for most households is their home. The net worth of housing (its

market value minus any outstanding mortgages) occasionally can change rapidly if

interest rates are falling and mortgages can be refinanced. This can free up large

amounts of cash that increase the purchasing power of households.

Another source of purchasing power flowing into the state consists of institutional

donations to individuals and nonprofit organizations. An example of this type of income is

the distributed earnings of foundations such as the Rasmuson Foundation. Of course, this

flow into the economy is largely offset by the donations of Alaska institutions to

organizations outside the state.

Private transfers like child support and alimony payments can also supplement Alaska

incomes and purchasing power. A potentially large transfer would be the payment of

damages by Exxon to Alaska households and businesses in compensation for the Exxon

Valdez oil spill of 1989.


Without information on the distribution of this non-earned income, we assume it is

evenly distributed across the population. Consequently if the population were to decline

by 50 percent, the non earned income driver would fall by a similar percentage.

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