In his 2015 State of the State speech just a month after taking office last December, incoming Alaska Gov. Bill Walker told how he learned a key lesson from the devastating impact the state's 1964 earthquake on his family's construction business: "Don't panic." This time around the shock therapy has come from the collapse of global oil prices in a state that draws 90 percent of its revenues from oil and gas.
Walker has presented proposals to cut spending, but looking further ahead, genuine diversification is crucial. That won't be easy in such a remote state weaned on oil drilling and accustomed to growing prosperity over the last decade.
Oil runs in the blood of Alaskans and has brought great prosperity to the remote state, which recently overtook Hawaii to be named the happiest state in the union in a 2014 ranking. But Alaska is no exception among petro-states, and investing so much of one's economy in one sector means that in bad times ideas need to be rethought.
Former Gov. Sarah Palin is one of many who see the solution to the state's woes is pushing forward with drilling Alaska's vast Arctic resources. However, those plans have been halted by President Barack Obama and regulators, who recently moved to cordon off swathes of territory away from the drillers in order to protect fragile ecosystems (Palin, for the record, argued that native caribou should "take one for the team").
Alaskans have long scorned intervention from Washington and have been sceptical of the need for taxation. All they asked was to be left alone to deal with their burgeoning oil and gas revenues as they saw fit. And by all accounts they have done a fairly good job.
In 1976, visionary Gov. Jay Hammond launched the Alaska Permanent Fund (APF), a pot of oil money insulated from the state budget that currently stands at just over $53 billion. At least 25 percent of annual mineral royalties must be transferred to the fund by law. At the time, Hammond said he "wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity," thereby overcoming the downfalls of the "resource curse."
The innovative feature of the APF is that each year a direct and universal cash dividend is distributed from the fund to each citizen, ranging from $1,000 to $3,000. In 2014, each man, woman and child received $1,884.
The fund is internationally recognized and some have pushed (and typically failed) to try it in other oil-producing countries; it is also unusual in being praised across the party lines. The cash dividend is particularly popular because it avoids the stigma of taxation, redistribution or dreaded "welfare" in a right-leaning state where there is deep skepticism toward a heavy-handed government. Alaska does not even have an income tax.
In the short term, Alaska can run down some of this rainy day fund for what looks like a stormy couple of years. In the longer term, however, Alaska will have to diversify.
Walker has joked that the answer lies in local enterprises and products like the Alaskan Brewing Company and carrots grown in the Matanuska Valley. Republican Craig Johnson soon quipped that "we will not fix our problems on beer and carrots." The most promising nonoil sectors in Alaska are in fact fishing, timber and tourism (in 2013, 1.96 million people were drawn by the unspoiled wilderness).
There is also a movement pushing for greater investment into renewables — hydropower, wind, solar and biomass — but the infrastructural investment to produce and transport renewable resources will be challenging. There is also resistance from Alaskans, who — according to a former Senate candidate — associate the industry with "granola, patchouli oil and posey-sniffers."
Alaska's laudable management of its oil wealth has allowed it to avoid many damaging effects of the resource curse — the paradoxical process by which regions rich in oil suffer both economic distortions and corruption. However, Georgetown academic Karl Widerquist has argued that the state may fall foul of the "third stage of the resource curse" if it continues to live off temporary revenue without looking beyond oil, leading to depression and economic deprivation.
There are worrying signs that Alaskan policymakers are not being realistic about the deep changes in global oil and gas fundamentals. The state has ambitiously forecast that oil prices will rise back to $90 per barrel in fiscal 2017, hovering until then at around $63.
Under this scenario, Alaska could ride out a temporary price environment with the help of its savings fund, which would be restocked when prices rebound. That forecast is doubted by most sector analysts.
The last few months have exposed the fragile foundations of prosperity in Alaska, America's most oil-dependent state. Walker told Alaskans in January that in order to deal with the chaos caused by the 1964 earthquake, his family "had to be creative" and "had to make sacrifices, lots of sacrifices."
Alaska in 2015 will also need a great deal of both to repurpose the state economy to more value-added industries, rather than simply blaming their finances on "dictator-in-chief" Obama and the EPA.
