My Turn: In the long run low oil prices are not bad for Alaska

  • By DANIEL HAMM FOR THE JUNEAU EMPIRE
  • Monday, December 21, 2015 1:00am
  • Opinion

Okay, now I have your attention because Alaska’s current fiscal crisis was predicted and solved over 39 years ago with low oil prices leading to Alaska’s economic deliverance and not necessarily our bane. Let me explain.

Over at least the last half-century, commodity prices (one of the biggest being oil) and the stock market have been inversely proportional — meaning as one goes up, the other goes down. U.S. manufacturing and distribution requires inexpensive raw materials and energy for substantial economic growth. When commodity prices spike, industrial states and the resultant stock market languish while oil producing states like Alaska boom — and tend to grow huge public sectors (ours has doubled since 2005).

In 1976, Alaska Gov. Jay Hammond established the Permanent Fund to fund state government when oil ran out. Imagine it like a huge investment pool worth over $50 billion where state oil revenue is invested. This pool has three statutory outlets in which to distribute the substantial interest income it generates. The first outlet is to pay out our annual dividend checks. The second outlet is used to inflation proof the principal- which was very necessary during the high inflation years of the 1970s. Lastly, and most importantly, the third outlet is to fund state government via the Earnings Reserve (ER). Today, there is around $7 billion in the ER- Alaska’s annuity that was designed to fund the majority of state government in perpetuity as Gov. Hammond envisioned. As the British might say, there is no bloody reason to cap the PFD check, raise state fees, or worse, establish a state income tax as has been proposed by the hard campaigning fiscal conservative turncoat Gov. Bill Walker. None.

“I wanted to transform oil wells pumping oil for a finite period, into money wells pumping money for infinity.” — Gov. Jay Hammond, father of the Alaska Permanent Fund and the Alaska Permanent Fund Dividend.

The state Legislature has not followed the Alaska State Constitution and tapped a penny out of the ER to fund our hemorrhaging $3 to 4 billion annual state deficits. Why? Politics of course! The Democratic minority in the Alaska state House enjoys incredible leverage by diverting public attention for using the ER to fund state government — which only needs a simple majority vote to access, to instead first depleting the $5 billion out of the Constitutional Budget Reserve (CBR) — which takes a larger two-thirds majority vote to access. A few cross-dressing Republicans like Representatives Jim Colver (Mat-Su), Gabrielle LeDoux (Anchorage), Paul Seaton (Homer), and Louise Stutes (Kodiak) have joined Democrats in forming a “Muscox Coalition” in refusing to access the ER because of the minority’s threat of tar and feathering them in the media during the upcoming 2016 election campaign for “spending the people’s PFD”— an outright lie of course. This gives the house minority tremendous leverage in extorting additional state spending to get to the necessary two-thirds vote threshold to pass a state budget — as what happened during the last interminable session.

Historically, when commodity prices such as oil plummet, the general economy is stimulated to grow rapidly and the stock market rises. Real estate prices along with interest rates also go up as Federal Reserve Chair Janet Yellen just indicated. It happened during the late 1960s as well as the 1980s and early 1990s. Low oil prices lower the price of everything. That is good for the U.S. economy and now Alaska because we now have an over $50 billion Permanent Fund that should produce substantial investment returns to fund state government. It’s good for Republicans because there is no reason for a state income tax or potential industry killing new oil production tax. It’s good for Democrats who will see the majority of state government funded by financial investment returns rather than that dirty black carbon producing oil pumped out of the tundra by evil Big Oil. Public unions will also come around when they realize they can’t spend everything in sight and having a stable government funding source to rely on benefits them as well. Low oil prices will once and for all force Juneau to streamline our bloated state government and end automatic formula driven growth programs that threaten our entire state economy. Low oil prices will also allow Juneau to reduce hundreds of millions of dollars in fuel subsidies in areas such as the Power Cost Equalization (PCE) program which subsidizes energy in the bush and the Alaska Marine Highway which consumes nearly half the state’s transportation budget.

Lastly but not insignificantly, on a national, state, and city security basis, low oil prices starve our biggest antagonists on the geopolitical stage. Oil funds ISIS and terrorist organizations throughout the Middle East and puts our sons and daughters that serve in the military at great risk. It also could indirectly lead to Syrian refuges being forcibly resettled in the Anchorage Bowl and all around rural Alaska — the majority of which cannot be vetted to see whether they are radicalized or not. The recent Dec. 2 terrorist attack in San Bernardino California that left at least 14 dead and scores more wounded attests to this fact because it was carried out by a least one recent immigrant.

I’m very supportive of maximum natural resource development in Alaska — it’s what we do. However, if we are smart and run a lean and efficient state government, we now have a financial mechanism to ride out the low oil price cycle with economic stability and security. It’s now time for our Republican leadership in Juneau to shine.

• Daniel Hamm is the president of the Alaska Republican Assembly.

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