Sunday Morning Note (Sept. 20, 2015) …

Sunday Morning Note ...As usual, we start this week’s note with last week’s data.

On the oil side, last week near term prices largely remained stable from the week before, and while longer term prices last week drifted downward somewhat from the previous week, they nevertheless continued to remain ahead of where they were a month ago, reflecting continuing confidence that oil prices will recover after the current supply overhang dissipates.

Here is the chart reflecting the closing prices this past Friday (an explanation of the source of the data is here) :

Sunday Note (9.21.2015)

Week on week (last week’s data is here), both near month (2015) WTI and Brent stayed within a very tight band, with WTI ticking up a nickle ($44.68 v. $44.63) and Brent ticking down less than 75 cents ($47.47 v. $48.14).  Farther out, both WTI and Brent drifted down, with 2020 showing the widest decline for WTI ($58.47 v. $60.06) and all forward years for Brent showing roughly the same $2 decline (2020, $62.69 v. $64.87).

Compared month on month, however, (last month’s data is here) all price levels were up slightly, both near term and forward, with 2017 WTI ($53.23 v. $51.40) and Brent ($58.00 v. $57.14) showing representative positions of longer term price levels.  While other factors play a role, the market appears still to be digesting and finding comfort in both the Energy Information Administration’s and International Energy Agency’s findings from last week (discussed in last week’s Note) that current production levels are in decline, creating the potential for reaching some semblance of current supply and demand balance in late 2016/early 2017.

The week’s markets tell a less positive story for natural gas.  Not only did gas fall week on week, it also has fallen slightly month on month.  Month on month, next month ($2.61 v. $2.70), medium (2017) term ($3.01 v. $3.09) and longer (2020) term ($3.23 v. $3.32) all tell the same story.  Again, the long term story in gas appears to be driving market behavior:  technologically-driven cost reductions and efficiencies are enabling producers to achieve the same level of returns at lower price levels.

While L48 gas prices don’t directly translate into similar changes for Alaska gas, I follow them closely for two reasons.  First, some are trying to position L48 gas to play a significant role in the global LNG market.  As a result, L48 price levels are having some influence on the competitive forces that are shaping the overall outlook for the Alaska LNG project.  Second, as others also have sometimes hi-lited, shale oil development and price levels are somewhat following the trail being blazed by gas, albeit with some lag.  It is important to keep in mind that oil producers may later follow as technological advances in gas enable producers to accept lower and lower price levels while realizing the same level of returns.

One other development from the week in gas is worth noting.  As readers will note, included in each week’s data is an entry for “Platt’s JKM” (Japan/Korea Marker) price.  That price represents Platt’s best effort to pierce what otherwise is a very illiquid and opaque market to identify the price prevailing in the current and near term spot LNG trade in that part of the world.  While the quote is directional, at best, the short term direction is not good.  This week’s near term close ($6.96) is down quite a bit from both last week’s ($7.62) and last month ($7.75).  Whether that represents an aberration due to the nature in which the quote is gleaned (one low priced cargo could be the cause) or something more significant is not clear.  It does, however, mean I will be paying closer attention to the market over the next few weeks.

This past week, most of my time was spent preparing, putting together materials and participating in the Forum on Alaska’s Fiscal and Economic Future, hosted jointly by Alaska Common Ground and UAA’s Institute for Social and Economic Research (ISER).  I have posted elsewhere on these pages the results of those efforts, including the “citizen proposal” I prepared, explained and defended for dealing with the state’s current fiscal situation, and videos of the sessions where all four “citizen proposals” presented at the forum were discussed, examined and defended.

While I am sure additional thoughts from the day will become clearer in the coming weeks as the debate continues, here are my Top 3 at this point.

1. I was impressed with the number of legislators and Administration officials that attended, a large portion of whom stayed the entire day.  From comments  and observations I recall seeing  Senate Majority Leader John Coghill, Senate Minority Leader Berta Gardner, House Finance Members Reps. Bryce Edgmon, Lynn Gattis and David Guttenberg, as well as Reps. Harriet Drummond and Shelly Hughes there all or most of the day, with Senate President Kevin Meyer and Reps. Matt Claman, Andy Josephson and Liz Vasquez also there at least a portion of the day.

One sixth of the legislature, including the President and Leaders of both parties in the Senate, as well as more than one-quarter of the House Finance Committee on what turned out to be a beautiful fall weekend day outside is an impressive showing.  Attending all or most of the day from the Administration also were Department of Revenue Commissioner Randall Hoffbeck and OMB Director Pat Pitney, and perhaps others that I either failed to notice or recognize.

My take away from their attendance is that, as we are turning toward Fall, legislators are taking the issue seriously and increasingly are interested in hearing a broad range of proposals concerning Alaska’s fiscal and economic future.  There are some emerging legislative thought leaders on these issues; most took to the time to be in the room.

2. I am deeply troubled by the rush to taxes and/or capping the PFD.  Three of the four “citizen proposals” (copies of which are available here) incorporate to a greater or lesser extent revenues from new or expanded taxes, and two of the four propose capping the Permanent Fund Dividend (PFD) and diverting the remaining revenues to help meet the costs of government.  Mine was the only proposal that did neither.

While I appreciate the argument that citizens should pay for some share of the cost of the goods and services they receive from government, I have two significant concerns about the approaches.

First, no one — no one — has done a recent study that shows what the effect on the overall Alaska economy will be from adopting such approaches.  In a 2010 paper, Dr. Scott Goldsmith, for my money the best economist in Alaska, concluded that if money injected into the state’s local economies through the PFD instead went to state government, the consequence would be “less [Alaska] employment and increased [Alaskan] income inequality.”  Certainly, I and others understand that those benefiting from the state’s  government economy would be better off, but the effect of taking at least that source of money out of the private economy would make both those more involved in the private economy, and more importantly, the state as a whole worse off.

We need a much better feel for the effect each of the proposed revenue measures will have on Alaska’s private and overall economy before enacting them, lest we find out later that those actions actually damaged the overall Alaska economy rather than helped.

Second, raising the level of government take from individuals and business during a time of economic challenge runs contrary to almost every economic theory imaginable.  Oil largely drives both Alaska’s government economy and its private economy.  With oil prices down, both economies are headed for difficult times, with layoffs and reduced buying power coming for both.  In that environment, broadly reducing the incomes of  Alaskan citizens and businesses, which both creating new taxes and reducing the PFD would do, makes no economic sense.  Alaska is already a high cost state.  Making it either an even higher cost state (through taxes) or reducing the revenue available to Alaskans to deal with those costs (through capping the PFD) will simply make the coming challenges worse.

Some argue that “priming the pump” through continued, and indeed, increased government spending during periods of economic stress is the better course,  suggesting that it is the same step the federal government takes when faced with economic stress at a national level.

But there are two important differences.  One, the federal government does so largely through borrowing, not increased taxes.   Few, if any,  economists have ever argued that increasing taxes during such a period is good policy.  Indeed, it runs directly counter to the goal of increased government spending in the first place, which is to increase incomes and thereby soften the impact of the economic conditions on individuals and business.  Taxes and, in Alaska’s case, capping the PFD would do the exact opposite.

Two, the federal government also has the ability to coordinate and supplement its efforts through monetary policy, i.e., expanding the money supply to help avoid the crunch of a down economy.  Alaska does not.  Attempting to use only a fiscal lever at a minimum makes the approach unbalanced, favoring only those selected by the government for the benefits of increased spending, if not downright dangerous.

The point is if government involvement is justified at all during periods of economic stress, it should be focused on steps which increase or stabilize individual and business incomes, not reduce them.  Enacting taxes and reducing the PFD go in the exact opposite direction and are highly likely to worsen the state’s coming economic distress, not improve it.  Those looking only to the impact on the state’s government economy are missing the impact on the overall economy — the much more important picture.

3.  Outside of the issues of taxes and the PFD, I was surprised at the level of consensus.  Surprisingly three of the four “citizen proposals” support reduced near term spending and all four propose using in some fashion the Permanent Fund earnings reserve — the portion of income from the Permanent Fund remaining after draws for the PFD and inflation proofing — to help meet the current economic challenge.

While the levels of proposed spending reductions differ somewhat significantly, still the fact that three of the four agree that some level of reduction is warranted is a good starting point for future discussions.

So to is the broad agreement on the use of money from the Permanent Fund earnings reserve (again, for those just coming up to speed on this issue, the portion of the income from the Permanent Fund remaining after draws for the PFD and inflation proofing).  That money is what economists sometimes call “new” money coming into the economy (to distinguish it from “recirculated” or “redirected” money which is simply being pulled from one place in the economy — in the case of taxes and the PFD, the private economy — to support a different set of spending).

As a source of “new” money, using the Permanent Fund earnings reserve to help supplement current revenues plays much the same role at the state level as borrowing does at the federal level.  It helps generate additional money and income at least in some sectors of the economy without reducing incomes in others.

Again, the consensus on the issue provides a good starting point for future discussions.

The coming week.  Important events during the coming week are the announcement of the 2015 PFD level, continued hearings on the future of reimbursable oil & gas tax credits and an all day “AK LNG Prep Seminar” Friday conducted by the Legislative Budget & Audit Committee.

We will discuss those issues, and more, in next week’s Note.

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