A recent Institute of Social and Economic Research (ISER) report commissioned by Northrim Bank and written by economist Scott Goldsmith has created a lot of media hype. The report is focused on disproving the sound bite that Senate Bill 21 is a $2 billion giveaway. Although it’s true that there is relatively little difference in the revenue generated under Senate Bill 21 vs. ACES at current oil prices, the report fails to sufficiently explain the difference between the two tax regimes at significantly higher or lower oil prices. If Senate Bill 21 had been the state’s oil tax system in FY13 (the last full fiscal year that ACES was in effect), the difference in revenue to the state would have been almost $2 billion. In response to Dr. Goldsmith’s report, I wrote the following editorial on June 19th that was published in various newspapers statewide.
Over the years I’ve read many of the reports written for the Institute of Social and Economic Research (ISER). In May, ISER published the report funded by Northrim Bank and written by Dr. Scott Goldsmith entitled, “Alaska’s Oil Production Tax: Comparing the Old and the New” which has been placed in the center of the debate to repeal the new oil tax enacted by the passage of Senate Bill 21. His analysis is thoughtful, but the title is misleading and should be retitled, “Debunking the $2 Billion Giveaway Myth.” That’s what the report is being used for in the public relations arena and I believe that it’s also the reason behind the report’s creation.
I agree with Dr. Goldsmith that in this current fiscal year, there is little difference between the amount of state revenue generated under Senate Bill 21 vs. ACES. The reason for that is because the price of oil in FY14 has remained in or near a narrow band of prices that makes the difference in the two taxes negligible. The $2 billion giveaway sound bite is a distraction and is not the issue Alaskans should think about before going to the polls in August. The issue they should consider is the fairness to Alaskans, the owner of the resource, under a broad scenario of oil prices and economic conditions. If the price of oil goes up, the profitability in our legacy fields will dramatically increase. Unfortunately, since Senate Bill 21 removed key elements of progressivity in our payment structure, Alaskan’s share of the profit will shrink. Furthermore, if the price of oil goes down, the per barrel credit the state pays the producers goes up, an unnecessary structuring that exposes more risk to Alaskans in low price environments. Senate Bill 21 is structured as if the State of Alaska is having a going out of business sale on oil.
I have consistently argued that the compensation under Senate Bill 21 for the value of Alaska’s hydrocarbons in the legacy fields is too low compared to similar world class basins around the world. In the marginal, non-legacy fields outside Prudhoe and Kuparuk, the tax regime is on the low side but within reason and passes the red face test. However, in the legacy fields the tax rate is not only too low to pass the red face test, Alaskans should blush. The graph on page 37 of Dr. Goldsmith’s report highlights that argument. It shows that the profitability of a barrel of oil produced from the legacy fields is three times that of a marginal, non-legacy barrel.
Dr. Goldsmith makes my point when immediately preceding the graph he states, “If the tax rate on the marginal field can be set lower than on the legacy field, it is possible to capture a large share of the pure profit from the legacy field as tax revenue, and at the same time to develop the marginal field. This could be a better outcome for both producers and the state because production value is higher in this case.” By repealing Senate Bill 21, Alaskans can send the message back to Juneau to enact an equitable profit split for Alaskan’s oil share in the legacy fields and keep key elements in place for the marginal fields.
I understand why the oil companies, some financial and regional corporations, and oil field service companies support the new fiscal structure and are urging Alaskans to vote no on Proposition 1 in August. It’s in their financial best interest to do so. I would probably have the same opinion if I were answerable to their shareholders. But as an elected official I’m responsible for protecting the best interests of the citizens of Alaska who are the owners of the extremely valuable, plentiful, and non-renewable oil resource on the North Slope. As it stands, I do not think Senate Bill 21 passes the Constitutional fiduciary obligation of elected officials responsible for setting the selling price of Alaska’s oil. It’s my Constitutional duty to voice my opinion that Senate Bill 21 represents a going out of business sale for Alaskans.
(Paid for by Senator Stedman using state resources.)
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