As readers will know, in addition to this blog we also regularly publish more frequent, shorter pieces on our Facebook, Linked In and Google+ pages. Links to those pieces are available in a box down the right hand column of this page, but on infrequent occasions we also have published them here when we believe they have more than the usual significance and want to ensure they have the widest possible distribution.
Yesterday’s piece summarizing our view of the two days of legislative hearings this week on the #AKLNG project is one such instance. The piece follows:
Friday’s “First Post” from Alaskans for Sustainable Budgets: We are considering nominating Don McLean’s “The Day the Music Died” (official title, “American Pie”) as the official theme song for the last two days of hearings before the Joint Senate and House Resources Committees on the#AKLNG project.
For those of you that weren’t born when the song was popular (a larger segment of the population than used to be the case), the song is McLean’s early 1970’s reflection on the day three idols of late-1950’s pop music died in an Iowa plane crash. It was, in his terms, “the day the music died.”
So it may be for the Alaska economy looking back on the last two days of hearings. While we — and others — continue to believe that there is a potentially successful way forward on the #AKLNG project as outlined just the day before by globally renowned oil & gas consultancy Wood Mackenzie (see yesterday’s “First Post” at https://goo.gl/1838MU), in various ways over the two days of hearings others declined to endorse it. As a result, in many ways the last two days feel like Alaska’s “day the music died.”
On the first day AGDC said that it was preparing to go it alone on a project that on the surface somewhat looks like the Wood Mackenzie proposal, but when you open up the hood lacks the fundamental safeguards needed to ensure the delivery of the project on time and within budget, an elementary precondition of successfully achieving the competitive cost structure at the core of Wood Mac’s outline. (See last Saturday’s “First Post” for a further discussion of those concerns, https://goo.gl/ZsRlIw).
Then yesterday in succession the three producer partners of the #AKLNG project went their own ways.
Exxon, going first, essentially said it was going to pick up its toys and go home. While it smiled the entire time and used words like “cooperate” and “work with,” the real message was “we are washing our hands of this mess and taking our personnel and methods and going elsewhere.” In essence, Exxon has made the decision to step back, let AGDC (and this Administration) try its own way knowing that it will crash and burn and then, maybe if other opportunities have not overtaken Alaska’s potential by that time, come back then and try again when Alaska is even more desperate than it is now.
ConocoPhillips, going last, essentially said, owing to the effect low oil prices have had on its balance sheet, it didn’t have the money to play any more and so, was folding its hand.
BP, somewhat meaningfully taking its turn between the other two (extremes), said it saw merit in the Wood Mac proposal and was prepared to step back from the current path (which Wood Mac concluded earlier in its presentation was bound to fail) in order to take the time needed to redirect the effort appropriately. But without anyone else to play with — since AGDC is speeding ahead in its own direction, Exxon is picking up its toys and going home and Conoco has folded — BP’s proposal landed as the business equivalent of “one hand clapping” (Urban Dictionary: “The sound of one hand clapping is the sound of one hand closing quickly.”)
So, why does all that mean the last two days are Alaska’s “day the music died”?
Because the #AKLNG project is critical to the future of the Alaska economy. Most that read these pages know that we use Dr. Scott Goldsmith’s “sustainable budget” model to evaluate and discuss Alaska’s fiscal future. We do that because it gives us a forward view of where the Alaska economy is heading and what steps we should be taking now to ensure that it remains sustainable into that future.
Using that we have argued this past year that the Alaska budget should be set no higher than in the range of $4.3 – $4.5 billion, a level that is sustainable based on our view of where the Alaska economy was headed with #AKLNG and other developments in its future.
That number also worked from the cost side. Some have suggested looking to past spending — before the run up in oil prices and state spending levels — as a guide for setting what current spending levels should be. Based on those criteria, most have suggested FY 2006 as a good proxy. Adjusting the FY 2006 budget for inflation and population growth results in a spending level of $4.1 billion, roughly the same as the sustainable budget number.
But that view becomes significantly different without #AKLNG in the picture. Removing #AKLNG, the long term sustainable budget number no longer is $4.3 billion — it becomes $3.5 billion, a spending level not seen, adjusted for inflation and population growth, since briefly during the early 2000’s, and before that not since the 1970’s. For good or bad, thinking that Alaska can shed that much current spending is wishful.
As a result, to offset the loss of revenues from #AKLNG, Alaska will be forced to do as many have been advocating already even at much higher spending levels — adopt income and sales taxes and potentially, even a head tax (i.e., PFD cuts). The result will be a significant erosion in Alaska’s private economy, as more and more of its resources are shifted to government to support the government sector. Once again, population flow will reverse, with out migration exceeding inflows plus net births, with a consequential loss in housing values and private sector vibrancy.
Sadly, we don’t think it has to be this way. As we said at the top, we think Wood Mackenzie has outlined an approach which has significant potential to keep #AKLNG moving forward, albeit on a different track. And as we explain above, we think that is critical to keeping the Alaska economy moving forward, both now and in the future.
But it takes all parties continuing to work together to push forward. Instead, what the last two days revealed is something like the grown up version of James Baldwin’s children’s book “The Nest Builders,” his version of the fable about the magpie’s efforts to teach other birds how to build a nest.
Here are the closing lines:
This made the magpie so angry that she dropped the straw and flew away before she had ended her lesson.
“What’s the use of trying to teach people who think they already know everything?” she said.
And that is how it happens that the different kinds of birds build their nests in so many different ways. The magpie never tried to teach them again ….
Maybe, unlike in the magpie’s nest, the other birds do come back and finally get on the same page. And maybe, like did happen with the music after the loss of Buddy Holly, Richie Valens and the Big Bopper, Alaska will find another way of keeping the economy moving forward.
But for right now the last two days of hearings have us feeling a lot more like Don McLean felt about February 3, 1959. They feel like “the day the music died.”