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Live by the sword

"Live by the sword, die by the sword." The old saying comes to mind as our friends in Alaska face a sudden drop in the oil revenues they have become dependent on.

“Live by the sword, die by the sword.” The old saying comes to mind as our friends in Alaska face a sudden drop in the oil revenues they have become dependent on.

The Alaskan government pulled in a whopping $7.4 billion (all figures U.S.) in oil revenues last fiscal year, over $10,000 per resident. The oil cash is three times the size of the federal transfer payment to the 49th state.

Canadians are often astonished to learn that the state has neither an income tax nor a sales tax. It has stashed away enough cash over the years that the state earns another $5 billion a year from its investments.

Not only is there no income tax but, as any Alaskan truck salesman or snowmobile vendor can tell you, each resident gets an annual dividend cheque. In 2008 the figure on the cheque was over $2,000, but this year it was only $900 due to low investment returns in the markets.

Unfortunately for Alaskans, the shrinking dividend cheque is a harbinger of more bad news to come. Oil production has fallen from around two million barrels a day in the late 1980s to around 500,000 last year. Further declines are expected and the famous Alyeska pipeline is far from full capacity.

More bad news comes from fracking and the discovery of vast unconventional oil fields in places like North Dakota. Surges in new oil production mean lower oil prices. Lower production and lower oil prices are a double whammy for the Alaskan budget (although individual Alaskans won’t complain about lower gas and heating oil prices).

Even worse, at least in the short term, is the new royalty program that Governor Sean Parnell recently introduced. It aims to boost production and government revenue in the long run by offering more favourable terms to oil companies. This may work in the long run, but in the meantime incentives to invest mean that revenues will go down in the short term.

The net impact of all this is huge. The state expects oil revenues to be a staggering $2.5 billion lower in 2015 than in 2013. While some of the shortfall can be covered by dipping into reserves, it means tough sledding for many government programs.

One of the victims is the Alaska Highway pipeline. Sarah Palin attempted to revive this 1970s-era project in 2007, passing the Alaska Gasline Inducement Act. She was such a big fan of the idea that she named her dog AGIA.

The Alaska Highway pipeline project has been a faithful companion for Alaskan politicians for years. But now, like an old sled dog who has reached the end of his trail, Parnell is taking the pipeline office out behind the woodshed and putting it out of its misery. Its $4 million budget has been cut to zero.

While this may please residents of Mary Lake who weren’t keen on having a 48-inch pipe carrying enough gas to power the Eastern seaboard just behind their backyard fences, the employees of the pipeline office aren’t happy. It also confirms the fears of Yukon First Nations and other governments along the pipeline route who were hoping for a slice of the estimated $100 million in property taxes and other revenues.

KTNA in Talkeetna also reports that the giant Susitna dam project has been severely cut. Apparently the Alaska Energy Agency needs $110 million for preparation work, and has been allocated $10 million. Ironically, if the dam is delayed or eventually killed it will make Alaskans even more dependent on fossil fuels for their heating and power.

Alaskan politicians are already debating the cuts, showing a flair for soundbites that Yukon politicians haven’t quite mastered. Senator Pete Kelly, a Fairbanks Republican, told the media that “state government has been eating a pretty high-fat diet the last 10 years and its pants are getting pretty tight. We have no choice but to put it on a diet.”

Anchorage Democrat Les Gara criticized the governor for choosing education layoffs, cuts to renewable energy programs and delaying implementation of a child-abuse prevention program.

Governor Parnell’s budget also includes a stiff 32-per-cent cut in the capital budget.

The governor’s budget proposal is just a starting point in the Alaskan system, where the elected members have considerable scope to modify the governor’s draft budget. In the Yukon, of course, changes are usually minimal once the budget comes out of the premier’s office.

Our Alaskan neighbours face some big choices. Some think this situation creates an opportunity to pivot from oil to a more sustainable and climate friendly energy policy. Others agree with Sarah Palin’s famous suggestion to “Drill, baby, drill!” to find new oil and gas to replace the lost revenue.

I’ll leave it to the reader to speculate about which strategy Alaskan voters will support.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. You can follow him on Twitter @hallidaykeith