Alaska's Arctic Oil Economy
As an Arctic location, Alaska — including both its state and federal waters — must balance several significant energy issues. The first priority line in the Alaska Arctic Policy statute is “promoting economic and resource development.” In this report, that theme is narrowed to focus on the nature of energy in Alaska, which directly relates to both economics and resource development. This is a critical topic due to the magnitude of economic activity in Alaska’s energy sector and its tie to domestic and foreign governments. In addition, planning for the state’s future economy must address both energy and environmental change. For example, the Alaska Arctic Policy Commission Implementation Plan prioritizes a port in the Bering Strait. Such infrastructure has significant energy needs as well as a structural design that takes coastal environmental change and local needs into account.
How did Alaska get here?
The reasons for oil production in Alaska can be traced to the 20th century needs of territorial residents and subsequently state residents for petroleum and fuel products to power snowmachines, outboard motors and other engines, as well as a demand for electricity. In the 1960s, with shrinking domestic oil supply, increased consumption and an impending election, President Richard Nixon lifted a ban on oil imports. In 1973, oil imports more than doubled, accounting for one-third of the U.S. demand. That same year, the Organization of the Petroleum Exporting Countries cartel unleashed an oil embargo in response to U.S. support for Israel during the Yom Kippur War. This resulted in the 1970s nationwide energy crisis. Costs of gasoline and other petroleum products jumped by 350% with a ripple effect through other industries, creating rising consumer prices. Along with some federal investments, it was the high price on the barrel that made the extensive testing, drilling and transportation infrastructure in Alaska affordable for industry. During the decades following the Prudhoe Bay oil discovery, Alaska’s institutions adapted to the oil resource. In 1976, Alaska responded to the need for self-sufficiency by creating the Alaska Energy Authority. Today the AEA is the lead agency for state energy policy and programs, and its mission is to reduce energy costs statewide.
ANCSA and the North Slope
The 1968 discovery of the Prudhoe Bay oil field and subsequent development of the trans-Alaska Pipeline fundamentally changed the northern coastal region. Taking advantage of provisions in Alaska’s Borough Act, North Slope leaders proposed a home rule borough with expansive taxation rights. Despite years of legal opposition from both oil companies and the state, the North Slope Borough incorporated and began to collect on oil property revenues in 1972.
Borough revenues grew at an annual average rate of 50% between 1974 and 1978, allowing leadership to undertake ambitious infrastructure improvement programs. Vital Iñupiat traditions like whaling persisted. New access to funding meant greater opportunity to support subsistence and cultural traditions across the eight rural communities that make up the North Slope Borough. At the same time, stable wage labor, purchasing power and the influx of Western culture marked a threshold of new demands and expectations among North Slope residents. The oil pipeline was completed in 1977, permitting the transport of Prudhoe Bay oil to Valdez.
The phenomenal volume of oil produced from Prudhoe Bay constituted ~17.7% of total U.S. production in 1981. By 1988, production peaked at ~24.9% with added volume from the Kuparuk River (1981), Milne Point (1985) and Endicott (1987) fields. Wage labor and subsistence became coupled in the borough’s new economy. Despite ongoing subsistence practices, the increase in wealth and education resulted in greater out-migration for both work and school. North Slope residents have always seen advantages and disadvantages to oil development, and are often split over continued development both onshore and offshore.
State energy plans
In 1979, the state’s first energy policy was put in place under Gov. Jay Hammond. Hammond also served in 1980 when the State Legislature voted to remove personal income taxes by a veto-proof majority in favor of the state’s income relying on oil taxation. This decision left the state without an annual, relatively stable revenue stream and severed citizens’ personal relationship with the cost of government. Over the years, the boom-bust cycle of global oil production drove various state energy policies.
In 1981, the state released its first long-term energy plan. This was the first of six plans to set energy policy and outline goals and objectives for the state. With a nod to sustainability, it stated that the plan would provide “a logical approach to meeting Alaska’s present and future energy needs.” However, the global nature of the oil economy changed the direction of state energy policy as oil prices dropped and the national energy crisis dissolved. From 1984–1986 federal funding for alternative energy and energy conservation disappeared, causing energy cost reductions and alternative energy projects to dissipate in Alaska’s long-term energy plans as low oil prices and budget deficits forced the state to further cut funding. After North Slope oilfields hit peak production in 1988, the continued decline in oil production exacerbated budget concerns and reduced available funding for energy projects.
In 2003, the Alaska Legislature attempted another energy policy by creating the Alaska Energy Policy Task Force. Its mission was to develop a long-term energy plan to efficiently enhance Alaska’s economic future. Two reports released in 2003 and 2004 provided current and long-term energy needs for Railbelt and non-Railbelt energy users. To push immediate action, Gov. Frank Murkowski created the position of Alaska energy policy adviser in the Department of Commerce, Community and Economic Development and named Nels Anderson to the post. Under Administrative Order #230, Anderson’s role was to “facilitate coordination of an energy policy for the state.” Anderson’s energy policy recommendations shaped legislation for the next few years, until national economic crises intervened.
On Feb. 17, 2009, the American Recovery and Reinvestment Act was signed by President Barack Obama. According to the White House, the Recovery Act made the “largest single investment in clean energy in history, providing more than $90 billion in investments and tax incentives.” With renewed federal support to invest in clean energy, Alaska received funding to support Anderson’s recommendations for a state energy policy. Between 2008 and 2010, the Alaska Legislature passed three energy bills. The first, HB 152, created the Renewable Energy Fund and Renewable Energy Task Force. The fund aims to reduce and stabilize energy costs through renewable energy projects. The bill was initially intended to annually fund $50 million for five years; however, in 2012, it was extended through 2023. As of February 2021, the Renewable Energy Task Force had funded $282 million in renewable energy projects, including $248 million in Railbelt and $34 million in non-Railbelt. An additional $138 million in matching funds was provided by applicants.
The second bill, HB 306, provided a roadmap for policymakers, utilities and conservation groups, with a goal of obtaining 50% of the state’s energy from renewable energy by 2025. Signed into law by Gov. Sean Parnell in 2010, it became today’s energy policy for the state, known as AS 44.99.115, Declaration of State Energy. The third bill, SB 220, outlined an action plan to achieve the goals of HB 306. The bill provides funding mechanisms, tax exemptions and transportation initiatives within the state for renewable energy projects. HB 306 set ambitious goals on a path toward energy security, but the legislation is non-binding with no requirement for future governors to follow through.
Alaska's oil timeline (click to enlarge)
Slow move to renewable
Almost a half-century has passed since creation of the Alaska Energy Authority. Various reports and recommendations have been presented to different administrations. Despite goals and objectives on paper, the state has made little progress reducing high energy costs or mitigating the boom-bust effects of an economy that relies heavily on oil. The disjointed nature and non-binding approach in state energy policy is problematic for the future. Stopgap measures and programs initially intended as temporary, such as the Power Cost Equalization program, are still in effect over 40 years later.
Like many Arctic economies, energy production is Alaska’s largest basic private-sector industry. Local energy consumed in Alaska is a non-basic industry. Urban Alaska energy consumption relies heavily on natural gas and some renewables, like hydropower, to generate electricity for residential, commercial and industrial uses. In rural Alaska, diesel energy is the primary source of power, though some renewables, such as hydroelectric and wind, are used.
- Non-basic industries meet local needs through goods and services.
- Basic industries, in the field of economics, refer to goods and services that export to outside markets and bring outside money into Alaska.
Alaska needs both sectors
For basic industry to benefit the state, there must be non-basic industries to purchase goods and services from. Non-basic industries provide local businesses for workers to spend earnings. A missing non-basic sector means earnings in Alaska “leak” out of the state as workers purchase non-local goods and services. The more money Alaskans spend on imported fuel to generate electricity and heat homes and businesses, the more money that is “leaked” out of state.
Comparing Arctic economies
Alaska’s annual domestic production compared to other Arctic countries is quite healthy for its size. U.S. Arctic (Alaska) has a larger gross regional product (GRP) than Canada’s Arctic despite less surface area. Alaska also exceeds the rest of the United States and non-Arctic Canada in per capita GRP (income). This demonstrates a successful management of basic and non-basic industries in the state. For example, Alaska produces oil to send to the Lower 48 states as a basic economic function, but the state also has its own internal businesses producing food and technical products to meet the needs of people and companies in Alaska including those working in oil and gas.
Comparing Arctic regions
Gross regional product in the Arctic
Employment in Alaska
As of September 2022 Alaska’s seasonally adjusted unemployment rate was 4.4%. The number has been steadily falling since 2012, except for the spike beginning in spring 2020 that accompanied the Covid-19 virus pandemic and its effects. Nonetheless, the likely sectors of future job growth in the next decade remain stable.
Alaska’s total workforce in the first half of 2022 was approximately 311,000. Nearly 22,000 jobs are in a broadly defined energy sector. In 2020, oil and gas industry spending in Alaska employed 3,208 residents by the primary companies, and 5,178 Alaska residents in oil and gas support services. State and local government spending using royalties and taxes paid by the oil and gas industry also contributes to job creation and local economic development in private and public sectors. The estimates of indirect job creation from the oil and gas industry vary, but are certainly in the tens of thousands. Annually, Alaska Native corporations are among the top five highest revenue earners in the state and employ over 15,000 Alaskans. Employment that is outside of extractive industries, often called the “clean energy sector,” includes 5,000 workers and is less than 2% of the state’s total workforce. About 700 people work directly in renewables. The rest are in energy efficiency employment, working, for example, to reduce the amount of energy required to heat a home.
The oil economy
Alaska’s economy is often described as a three-legged stool. One leg is spending from the federal government, another is the oil industry and the third represents all other basic sectors including mining, fishing and air cargo.
More than any other private sector industry, oil supplies more direct (jobs from producers), indirect (jobs that support direct jobs) and induced (which come from the multiplier effect and spending in the economy) jobs. For example, as the cost of oil rises on the global market the oil sector grows and attracts other businesses such as technology for energy production, logistics, catering and housing. This growth means employees spend more in the economy, triggering development in other economic sectors. Similarly, these sectors and their jobs shrink following a drop in the price of oil.
While oil dwarfs other industries in economic impact, employment levels are also more volatile because oil exploration and production respond sensitively to oil market prices. Oil prices are set on the global market and drive levels of production more than other factors, including taxes.
Downturns in oil prices generally align with periods of job loss and weaker economy. Developments in efficiency, like automation, have also led to fewer jobs returning after slumps in oil prices.
Though rising oil prices increase revenue and investment in Alaska’s oil industry, they also lead to higher heating cost for homes and businesses. Transportation is more expensive whether by snowmachine for subsistence or flying people, goods and services to rural areas.
This is called a “polar paradox” — rising oil prices bring more money into the state, but also increase the cost of living, maintaining local industries and developing new business. For example, public school budgets may increase with larger state revenue, but as energy costs rise, families have less disposable income.
In Alaska and other Arctic locations, this tension is amplified by people’s heavy reliance on energy for heating and transportation. Alaska electricity prices are the second highest in the U.S., topped by Hawaii, and prices have grown the second fastest over the past two decades.
Petroleum and natural gas make up most of Alaska’s energy consumption. In Alaska, jet fuel accounts for 64% of the petroleum consumed. The national average is 10%. Flying provides essential access to rural communities and powers Alaska’s burgeoning air-cargo industry. Petroleum production, such as enhanced oil recovery, uses 70% of the natural gas consumed. Residential uses of energy and electricity production are relatively small compared to industrial and transportation uses.
Oil investment barriers
The complex and changing fiscal environment in Alaska can translate to uncertainty for oil producers and disincentivize investment. Alaska’s uncertainty is due to declining oil fields, major environmental changes, shocks to international financial systems and rapid policy changes.
Since 1977, Alaska’s oil production tax has changed several times. Nationally, as the partisan compositions of the U.S. Congress and executive branch changed over time, Alaska has had to adapt its own energy regime. Internationally, tensions between the U.S. and China in relation to Taiwan affect the state’s liquefied natural gas project plans, and Russia’s invasion of Ukraine is reshaping global energy markets.
Infrastructure also remains a significant limitation for development in Alaska. Climate change threatens ice roads, increases cost of operations and puts existing infrastructure at risk. This may discourage producers from exploring new projects.
The effect of innovations in horizontal drilling and hydraulic fracturing have been transformative outside of Alaska, allowing other states like Texas and North Dakota to be more favorable for future development. North Dakota went from producing no significant oil in the early 2000s to producing 2.5 times the amount produced by Alaska in 2021.
Capital discipline -- a shift in focus away from riskier exploration and toward guaranteed returns for shareholders -- has altered the way the oil industry approaches production in Arctic Alaska.
Policy implications of Alaska's oil economy
The lack of revenue diversity in the state ties its citizens and businesses to the boom and bust cycle of the global hydrocarbon economy, which Alaska cannot control or direct. This creates uncertainty in the state’s economy that can disincentivize business investment and cause instability for individual households, particularly outside of the Railbelt. Diversification of the state’s economy can buffer private and public sector jobs, investment and government budgets and can provide opportunities for innovative economic and technological advances to foster job growth for residents. Alaska does not have to choose between renewables or oil, and in fact the state’s recently diversifying energy portfolio shows that Alaska can be a leader in deliberate energy transition.