Encouraging American Energy Independence

Encouraging American Energy Independence
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Again and again, it has been said that our nation is in the midst of a boom in energy exploration that has put tens of thousands of Americans back to work while reducing our dependence on unreliable and even hostile sources abroad for our energy needs.

The revival is playing out across the nation: Pennsylvania, where new pipelines are being built; Washington state, where an export terminal is nearing completion to ship coal to energy-starved markets overseas, and on and on. But if there is a state that has an important role historically in America’s energy independence, it is Alaska.

And while the state’s dominance in the nation’s energy market has declined in recent decades, it remains an important source of oil and gas. But the state’s peculiar political culture, fiscal unsteadiness, and other troubles are threatening Alaskans just as the state is poised for an energy revival of its own.

Specifically, lawmakers in Alaska have worked for months, in good faith, to address the state’s harrowing budget situation. Those efforts have not yet yielded success. And as a special legislative session stretches into overtime and the impasse between state House and state Senate negotiators continues, the threat of a government shutdown is very real -- and troubling.

Desperate times call for desperate measures, including the threat of a paralyzing government shutdown. But the desperation currently being felt by lawmakers and Alaskans of all stripes must not be allowed to result in a loss of focus on delivering a new budget structure that puts the state’s future on a stable foundation. And ensuring a vibrant, healthy oil industry must be a part of that stable foundation.

In that context, it is imperative that lawmakers and Governor Walker arrive at a solution to the current standoff that avoids cutting the legs out from under a sector that has, for generations, served as the lifeblood of Alaska’s economy.

As Governor Walker and conference negotiators weigh their options and attempt to resolve the crisis before it deepens further, they would do well to avoid some of the options that have been put on the table, chiefly proposed tax and budget initiatives that would make the oil industry less competitive than it already is in the state.

The basis of my views on this matter is deeply rooted in my experience in global energy markets and the financial services industry, as well as my professorial lectures at colleges and universities where I teach international business, public economics and more. A common dilemma in academia, business, and politics is ascertaining the right fiscal policy that balances budgetary needs with minimal to no impact on the lives of everyday working people.

It would well serve the Governor and legislative leaders to remember that thousands upon thousands of Alaskans depend on the oil industry for their livelihood. Some work for oil companies. Some work for companies that support oil companies. Some work in towns whose local economies depend heavily on the money spent by those that work for oil companies — not surprising, given that one of every three Alaska jobs is in the oil business.

Optimizing and modernizing the tax code to fit the realities of the marketplace is a worthwhile and necessary undertaking. Oil prices ebb and flow, and those price dynamics can have a significant impact in a state whose budget depends so heavily on one sector for its revenue. But policy should not be driven by the cyclical price dynamics in the energy industry, as some leaders have suggested.

There is no question that the current system can be improved, and against the backdrop of the state’s current budget predicament, the drastic action does appear warranted. But even in today’s environment, the stark differences between the two competing proposals illustrates the importance of focusing on policy details rather than rhetorical barbs in writing budget policy.

The House bill, HB 111, represents a significant tax hike on the oil industry that would darken the future of the sector in Alaska with a “massively significant” change to the way that taxes are assessed. By 2026, the tax hike will amount to nearly $500 million, and the bill will increase the cost of producing oil in Alaska by $7 per barrel. In doing so, it would discourage risky, but necessary investment by oil companies in new Alaskan oil fields put the backbone of the state’s economy at risk. According to the Alaska Oil and Gas Association, the plan would result in “less projects, less jobs, and less production.”

HB 111, in other words, would hamstring an industry that still accounts for 90 percent of Alaska’s tax revenue. And this is supposed to somehow solve the state’s budget crisis?

The Senate alternative, while still calling for a tax increase for oil companies, adopts a more realistic approach to modernizing the oil tax code. It is an approach that better reflects the nature of oil price dynamics and is more conducive to the ongoing, speculative investment that is essential in the energy industry.

The measure offers a smaller immediate revenue grab for state coffers. But in place of that, it provides sound tax policy encourages the industry rather than singling it out of a revenue grab. Sound budget policy is about the construction of sustainable frameworks built with the future in mind.

Sound budget policy is also about sensible spending – a practice that has eluded the Alaskan government for far too long, the absence of which has contributed significantly to the current budget crisis.

Negotiators have an opportunity to end the current predicament in the days ahead. Alaskans should hope that those they elected to represent them will reject the political nearsightedness of HB 111 and instead support budget policy centered on restrained spending and a stable long-term tax and fiscal environment.

Desperate times call for desperate measures – but even desperate measures must be rooted in a desire to do no harm. The oil tax measures in HB 111 would make it harder for Alaska to attract oil investment, would reduce employment in the sector, and would put the state on even weaker financial footing.

For the sake of Alaskans and American energy independence, the Governor and legislative leaders would be wise to take the prudent path here.

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