Alaska Annual
Economic
Outlook
2012-2013
University of Alaska Center for
Economic Development
Table of Content
Structure of Alaska's Economy ... 4
Petroleum and Federal Money ... 4
Key Industry Sectors ... 5
Development Challenges and Opportunities ... 7
The Alaska Department of Labor and Workforce Development is predicting widespread but modest job growth in 2013, estimating a gain of 4,200 jobs, or 1.2% over 20121. This is consistent
with the 1-2% increase in Alaska jobs every year for the last ten years, with the exception of 2009. The seasonally adjusted unemployment rate has fallen to 5.9% in May 2013, down from a high of 8.2% in December 20092.
The high unemployment rate at the end of 2009 was a consequence of the “Great Recession,” the worst downturn, by some measures, since the Great Depression. Alaska weathered the contraction of 2008-2009 with fewer job losses and less economic pain than most states. The state’s strong dependence on two relatively sheltered sectors—government spending and petroleum production—largely prevented the mass layoffs and sharp downturn in economic activity seen elsewhere. Still, Alaska was not altogether exempt from the pain; the state broke its 21-year record of continuous job growth in 2009, a record which withstood two prior recessions. A serious point of concern for Alaska in the coming years stems from proposed federal budget cuts. Proposed budget cuts over the next decade could top $1.5 trillion, and be the largest spending cuts since World War II. In 2010 Alaska received more per capita in government spending in the United States. As evidence, federal investment supports an estimated one-third of all jobs and income. This makes the state especially sensitive to changes in federal expenditure3. Alaska anticipates federal reductions in Defense Department spending, National
Park Services and to Indian Health Services, although no substantial cuts from the federal government have occurred as of this writing, the future is still uncertain due to the effects of budget sequestration.
For all of the concerns facing Alaska, several growth possibilities still exist for the state. Within the mining sector the Donlin Gold Project, Chuitna Coal Project, and the Pebble Mine Project all provide potential growth opportunities in the coming years as these projects continue through the pre-permitting and permitting phases, potentially entering the full production phase in the coming years. There is also the potential for pipeline construction connecting the Beaufort and Chukchi seas with the TransAlaska pipeline. While this presents a future opportunity for the state, it is unlikely it would be implemented any time in the immediate future.
Despite Alaska’s relatively strong performance during the latest recession, the state will face serious economic challenges in the foreseeable future. Over-dependence on oil and federal funds, long sources of stability, has left the state’s economy seriously undiversified. As petroleum output falls and federal policymakers shift their focus from stimulus to deficit concerns, Alaska may be forced to confront difficult decisions. As evidence, economist Stephen Fuller of George Mason University estimates potential job losses in Alaska at 10,400 if federal reductions hit their full projected level.
1 Alaska Economic Trends, January 2013
2 “Unemployment Rate, Alaska” U.S. Bureau of Labor Statistics 3 Alaska Economic Trends, February 2012
Structure of Alaska's Economy
Economists at the UAA Institute for Social and Economic Research (ISER) have shown that Alaska’s economy rests on a “three legged stool. The three legs are: 1) Federal government spending, 2) Crude oil production, and 3) All other basic industries combined, such as mining, fishing and tourism.4 The state’s economy can be understood as a three-legged stool. These three
“legs,” or basic sectors, are the federal government, the petroleum sector, and a third category that includes all other products and services with This latter grouping consists of commercial fishing, tourism, mining, retail, air cargo, and other industries. Each leg is responsible for generating—directly or indirectly--roughly a third of all in-state jobs.5
Alaska’s economy bears strong similarities to other resource-producing states, with its undiversified economy and dependence on key industries. The state has an enormous land mass, small population, and underdeveloped infrastructure. Much of the rural population depends on sea, river, and air transportation for necessities. Aside from the main highway corridors, those areas with the most developed infrastructure are either the sites of large resource deposits or are essential for providing logistics for natural resource development. This reflects the state’s lack of economic diversity. At present, Alaska’s population is overwhelmingly dependent on petroleum and federal spending to create and retain jobs.
Petroleum and Federal Money
As two legs of the stool, the federal government and oil and gas industries account for two-thirds of all Alaska jobs. These two industries dwarf tourism, mining, retail, and commercial fishing as engines of job creation, and help explain the state’s apparent immunity to many macroeconomic trends.
The federal government is the single largest source of jobs in Alaska, exceeding even the petroleum industry. Alaska has one of the highest rates of per capita spending in the country, at roughly 50% greater than the national average. Federal spending in Alaska grew dramatically from 1998 to 2005, but since then the baseline spending has remained roughly the same and even fallen slightly. The federal government boosted this baseline spending with the American Recovery and Reinvestment Act (the federal government’s stimulus program), which brought $2.2 billion to the state from February 2009 to July 2011.6 Military operations, infrastructure,
federal landholdings, and health programs for the Alaska Native population of the state are the usual targets of federal monies. Federal reductions not only impact payrolls, but reverberate around the Alaska economy impacting small businesses (i.e. cleaners, restaurants) to real estate. The petroleum industry provides for an average of about 110,000 direct and indirect Alaska jobs, just shy of the federal total of about 125,000. Only a small fraction of this total works directly in oil and gas, however. Revenues collected from the industry fund three-quarters of all jobs in state government and over half of all local government jobs. A large share of the workforce in finance, real estate, and construction also depend on petroleum industry spending.7
4 General Alaska Business Climate. Retrieved from
http://prosperityalaska.org/page.asp?content=business_climate&g=ALASKA_B. Retrieved on 07.21.2014.
5 “What Drives Alaska’s Economy?” UAA Institute of Social and Economic Research
6 “Federal Spending in Alaska: Running Out of Steam?” UAA Institute of Social and Economic Research 7 “What Drives the Alaska Economy?” UAA Institute of Social and Economic Research
After a period of volatility in 2008 which sent prices up to nearly $150 per barrel and then down to $30 per barrel, oil prices steadily increased back up to around $110 per barrel in 2011. Since then, oil prices have hovered between $100 and $120 per barrel.8 So far in 2013, the average
monthly price per barrel of oil is down slightly from 2012, averaging approximately $107 per barrel over the first half of 2013. Over the same time period in 2012, the monthly average price per barrel was approximately $114. Prices have tended to increase as production falls, providing a “cushion” for the state.
Heavy reliance on petroleum and federal spending provide a foundation for the state’s economy that bears little resemblance to the drivers of the national economy. While softening the impact of national and global downturns, this dependent relationship also poses risks, as mentioned earlier.
Key Industry Sectors
Alaska’s quick recovery from the effects of the recent recession can be primarily attributed to the strong performance of the oil and gas industry and the growing need for healthcare services within the state. For all of the talk regarding federal spending cuts, Alaska’s federal workforce has not taken as much of a hit as many would have initially predicted. The state lost 700 federal employees in 2012, and is expecting another decline in 2013, but likely by a smaller amount9.
However, this accounts only for direct jobs lost, not the many indirect jobs that rely on the federal government.
Altogether, federal, state, and local employment directly account for just over 25% of the state’s total non-farm workforce. This high dependence on government employment makes the state especially susceptible to budget cuts at the various levels of government. Although the effects of budget cuts have been minimal thus far, the risk for employment cuts within the government sector remains a very real concern. Despite still having a heavy reliance on government employment, however, the state has nonetheless been increasingly successful in diversifying its overall economy. A breakdown of the state’s other key sectors:
Oil and Gas: The oil and gas industry has continued to be a strong performer for the state. The industry is predicted to have a 2.9% growth in jobs. Exxon Mobil recently was issued a permit to begin production on the Point Thompson field. This construction project will build roads, drill pads, and other infrastructure. This project will take several years to complete, but may begin picking up as early as 2013, furthering job growth within the industry10. Several other potential
construction projects exist, but it is not sure how soon they will begin to become operational. Altogether, the oil industry funds over half of the state budget (56% in 2012), illustrating the high importance of oil for the state’s overall economy. Overall oil production within the state has declined significantly, with 2011 being the lowest recorded amount of oil moving through the TransAlaska pipeline since its first year of production. Despite the reduction in oil production,
8 “ANS West Coast Average Spot Price.” Alaska Department of Revenue: Tax Division 9 Alaska Economic Trends, January 2013
employment is not likely to drop in the near future. This is because the enhanced methods required to maintain production in the later stages of an oil field’s life cycle are generally more labor intensive11.
Construction: Construction is being predicted to experience a .6% job growth in 2013, and is expected to grow by 10 percent over the next decade, adding 1,600 jobs by 2020. Construction experienced a setback in large part due to reduced government spending after the stimulus following the recent recession. However, construction has now rebounded and appears poised for modest growth in the near future after experiencing job losses in recent years. Construction related to oil and gas development should help buoy the industry in the face of flat and declining federal spending.
Commercial Fishing: Commercial fishing remained strong in 2012, despite a slight decline from 2011. Total catch values in 2012 were $1.682 billion, down slightly from the $1.868 billion recorded in 201112. While the overall number of permits owned by Alaska residents has decreased
by approximately 10% since 2003, revenues remain strong, netting the third highest catch total in the last 10 years.
Tourism: Tourism is predicted to experience a 1.2% job growth in 2013. Out-of-state visitor spending totaled $1.692 billion in 2011-2012, a more than 10% increase from the $1.503 billion generated in 2008-200913. This increase in out-of-state visitor spending has been coupled with a
slight drop in the total number of visitors to the state over the same period, indicating that visitors to the state are spending more on a per capita basis. Tourism is expected to experience moderate growth as the rest of the country continues to rebound from the recession and the economy further stabilizes.
Health Care: Health Care is expected to grow by 4.5% in 2013. Over the next decade growth is predicted at 31%, the highest of any industry in Alaska. This high growth is being driven by the aging population of Alaskans, as the population of those 65 and older is expected to increase by 80 percent by 202014. Of the 50 highest growth occupations in the state, 47 are health care related.
Retail: Retail is predicted to experience a .3% growth in jobs in 2013. The industry is expected to grow by 11.4% over the next decade, adding 4,000 jobs by 202015. Recently both Petco and
OfficeMax opened stores in Juneau. Alaska is also expected to see the introduction of Verizon, AutoZone, and Sport Clips, as well as other retailers. Overall, it is likely that the retail boom of recent years is over, but the industry is still expected to experience moderate growth in the coming years16.
Mining: The mining industry has been a star performer over the past decade. Production value of minerals increased from just under $1 billion in 2001 to approximately $3.5 billion in 2011. These gains have been from both the introduction of new mines as well as expansion of currently existing facilities. Two of the leading state exports are zinc and lead. In 2012 the state ranked 6th
11 Alaska Economic Trends, October 2012 12 Commercial Fisheries Entry Commission
13 Economic Impact of Alaska’s Visitor Industry 2011-2012, McDowell Group 14 Alaska Economic Trends, October 2012
15 Alaska Economic Trends, October 2012 16 Alaska Journal of Commerce, February 2012
in the country for total production value and the industry is projected to grow by 19.3% by 202017.
The recent growth of the industry has in large part come from the expansion of gold mines. The industry has also seen a strong growth in wages, seeing wages increase by 22% from 2002 to 2011.
Development Challenges and Opportunities
While the current structure of Alaska’s economy has ameliorated the effects of the recent recession, it will pose difficult challenges for the state in the future. Fortunately, numerous opportunities to overcome these challenges also present themselves.
Because the state is so dependent on the federal government and the petroleum industry it is particularly susceptible to reductions in federal spending and declining oil prices or production levels. Federal spending cuts seem increasingly likely as political rhetoric shifts towards the growing national debt, with high stakes stand offs in Congress a regular occurrence. Likewise, long-term reductions in oil production are inevitable as the state depletes its oil supply. As of 2010, only 21% of the state’s original oil supply remained, and that number is expected to drop to 13% by 2020.18 In particular, production in the state’s largest oil field, Prudhoe Bay, is in
decline and no equivalent field is available to make up the shortfall. To compensate for falling federal spending and petroleum production the state will need to make serious efforts to diversify its economy.
Complicating matters further, the state also faces unique difficulties related to its geographic location. First, Alaska's geographic isolation increases the cost of trade, which is harmful to the economy. Also, the state is highly susceptible to natural disasters, including earthquakes, volcanoes, and coastal erosion. Coastal communities near the Arctic Circle are particularly susceptible to climate change as the Arctic ice shelf shrinks. Recent years have already seen the need for several villages to be relocated. So far, over 10 villages threatened from coastal erosion and flooding have begun exploring the idea of village relocation. In addition, the state’s cold, long winters and underdeveloped infrastructure raise other obstacles, especially in remote, rural Alaska, off the road system. For instance, food costs in rural Alaska are as high as 250% of those in Anchorage.19
In addition to problems of geography and the reliance on federal and petroleum money, analysts have identified other weaknesses in the state’s economy. These include:
Underdeveloped culture of entrepreneurship
Lack of focus on opportunities for diversification
Lack of strong connections to the global economy20
17 Alaska Economic Trends, May 2013
18 “Alaska’s Economy: The Challenge Ahead.” UAA Institute of Social and Economic Research 19 “The Cost of Living in Alaska.” Neal Fried, economist
Strengthening the business environment to alleviate these concerns may not be a simple task, but the state possesses assets which may help. The need to deliver services, such as education and medicine, over a large, unconnected geographic area has led to advancements that can serve as models for other parts of the world. The state’s natural beauty makes it a very popular tourist destination for domestic and international travelers. Furthermore, Alaska’s strategic location on the Pacific Ring makes it an obvious center for air and sea freight, as well as military operations. Ted Stevens International Airport even ranked as the fifth busiest airport in the world by cargo traffic in 2010. The Alaska Partnership for Economic Development (APED) has identified several “seed” clusters in the state, embryonic industry-sectors with high potential for growth. These include:
Alternative energy
Cold climate technology
Rocket launch technology
Cold climate housing
Specialized super computing capabilities
Distance delivery education, medical, and management services
Light aircraft operations, maintenance, and navigation
Marine and arctic biological sciences and aquaculture
Remote communications technologies
Aerospace technology
Naturally grown food products21
Fortunately, economic development organizations and state policymakers are beginning to devote attention to these seed clusters and diversification in general. APED has helped bring renewed focus to these under-developed economic areas. The Center for Economic Development has also served numerous clients in several of the categories above, as this annual report will show.
As with the rest of the country, local, state, and federal government agencies offer a number of programs specifically targeted on economic development in rural areas. In Alaska the Denali Commission helps to focus these efforts and to ensure that government funds provide the greatest leverage for development. In addition to public support, rural Alaska has strong champions in the private sector: Alaska Native Corporations (ANCs). These private corporations were established as part of the Alaska Native Claims Settlement Act in 1971. ANCs include some of the largest private companies in the state, and are able to bring private resources and the perspective of private industry to rural development projects. At the same time they provide a convenient local partner for other private business. Oil companies on the North Slope and mining companies in the Northwest Arctic and Yukon-Kuskokwim areas have teamed up with Native corporations to improve local hire and maximize the local benefits from large natural resource development projects.
Conclusion
The structure of Alaska’s “three-legged stool” economy largely protected the state from the severity of the latest global recession. High oil prices and stimulus spending helped insulate the state economy to a degree seen in few other states. In the long-run, however, the same structure that helped Alaska through the recession may cause it serious problems.
The futures of two of the major legs of Alaska’s economy – petroleum and federal spending – are not promising. As oil production falls and the federal budget faces cuts, the state will need new industries to compensate for the contraction of its current largest industries. Some high-level attention is now being devoted to this problem, but extensive efforts will be required to promote new, vibrant clusters in the state.
Alaska’s economic challenges, therefore, concern the future growth of state industry far more than the recent global downturn. An undiversified economy, poorly developed infrastructure, geographic isolation, and dependence on a key sector such as oil and gas all pose risks to the state’s long-term position. Although formidable, Alaska has the capacity to overcome these difficulties. A healthy mix of public and private institutions is working to strengthen and diversify the state’s economic foundations and build a path to continued prosperity.
