Alaska's cash cow: where's the beef?

On Dec. 14, Gov. Sean Parnell rolled out his fiscal year 2011 state budget complete with an 8.6 percent increase in state general fund spending next year, to be paid for with projected high oil prices.

While proposing to hold individual agency operating growth to 2 percent, Parnell is proposing an aggressive university tuition plan and has laid out a capital budget that calls for tens of millions of dollars to be invested in projects like a new state crime lab, a life sciences building at the University of Alaska Fairbanks and new roads to open up Alaska's resource rich areas.

"Capital spending is investment spending; it's got long-term benefits for all of us. That's why I'm pumping up Alaska's spending muscle in the capital budget," Parnell told Sean Cockerham of the Anchorage Daily News.

This kind of capital budget talk excites a lot of people; after all we love to build roads, prisons and schools. "These dollars will fuel Alaska's economy, provide long-term economic opportunity and will put Alaskans to work," Parnell said.

While these projects each have merit, it's important to remember that these projects will all drive government agency operating costs in the future.

More state roads are going to require more state road maintenance. More college scholarships given to Alaskan students will require Alaska's university to have the infrastructure to meet their academic needs. Newer facilities will require increased funding to cover operation and maintenance costs.

And while it sounds good for any governor to assure taxpayers that some increases will be absorbed by the agencies' existing budgets, the truth isn't so simple. The problem with ignoring costs is it does little more than shift costs to a later date, when they become too big to ignore.

Furthermore, since roughly 90 cents out of every dollar that is spent by state government comes from a non-renewable resource, pushing costs into the future is fraught with risk.

The new fall 2009 revenue forecast published by the Department of Revenue shows a good reason to be concerned about future oil production on the North Slope in the coming years, especially when compared to just five years ago.

In 2004, the state forecasted that in the year 2015 there would be 345,000 barrels being produced, 243,000 barrels under development and 262,000 under evaluation for a total of 850,000 barrels per day.

In 2007, the state forecasted that in the year 2015 there would be 428,000 barrels being produced, 107,000 barrels under development and 149,000 barrels under evaluation for a total of 684,000 barrels per day.

In 2009, the state is now forecasting in the year 2015 there will be 385,000 barrels being produced, 213,000 barrels under development and 25,000 barrels being under evaluation for a total of 623,000 barrels per day.

A quick glance at the latest forecast shows the closer we get to 2015, the more dramatic the drop off in both the number of barrels being produced and the number of barrels under evaluation.

In short, when it comes to the future of Alaska's oil and gas industry cash cow, where's the beef?

Even glancing at a different chart which forecasts oil production in 2018 leaves little room for doubt that there is trouble ahead.

In the Department of Revenue's 2007 fall forecast they predicted the total North Slope crude production in 2018 would be 680,000 barrels per day. Today that number has been revised to 561,000 barrels per day.

Arguably the most stunning statistic included in the 2009 fall forecast is that by fiscal year 2015 over 38 percent of our projected oil production will come from projects requiring significant new investment.

To add to the future revenue pressures faced by Alaska, the cost of state government will only continue to rise. In Parnell's budget roll out on Monday he pointed out more than half the 5.6 percent increase in his budget for state operations is for programs such as Medicaid in which spending automatically grows when more Alaskans are eligible.

If anyone doesn't believe the 2010 gubernatorial race will be about the economy, they're kidding themselves.