Comment of the day: Should we fear declining oil prices?

Comment from Lynn Willis, in response to my fear of buying a home given the scary drop in oil prices:

I cannot control what has been done to us by the current crew in Juneau. Remember a single political party has absolutely controlled the House and Governor’s office for the past four years and the entire state government for the last two years. They have hyper- inflated the economy as did their predecessors in the 1980’s and I fear with falling oil prices the state economy will again hollow itself out. You would think they would learn. This time the situation is much more perilous because in the 80’s we had the production levels so we only needed an increase in price. Now we have to realize both increased production and price and that will be much more difficult.

I hope you can afford a home. Perhaps you should wait patiently. I bought a condo in 1983for $83,000. Then the price of oil collapsed and when I moved to Bethel in 1989 and turned it into a rental the fair market value was $21,000. Lost money on that place when I finally sold it but somebody got a deal. Alas, the pressure on the middle class is unrelenting. Yesterday I got notice that another 5% increase to my Enstar charges has been requested and I can add that to over 50% cost of gas incurred over the last year.

Any damn fool can spend money yet that seems to be the chief qualification we want in our politicians and to be reminded that they have those “God given, rock solid conservative family values”. Maybe next time around we should expect more.


17 thoughts on “Comment of the day: Should we fear declining oil prices?

  1. akmom

    After hanging on to the zero lot line for a few years I could have used a free t-shirt. Lol. I don’t remember the Abe program that you mention but we were very young and inexperienced on that first house buy. In fact we purchased it on a non-qualifying assumable loan which is extinct now for good reason. I think that there were a lot of complex “perfect storm” situations that created that crash. This is not to dismiss your concern of present conditions however. I agree that they are valid. I just don’t see the same “super heated” building economy that we had in the 80’s.

  2. Lynn Willis

    Would help would to control spending come from: 1). Stopping the ability of the legislature to condition membership in the majority caucus on agreeing to support the budget regardless of the amount of spending. 2). Ending the ability of individual legislators to refuse to hold hearings on bills without explanation because this appears to be the perfect tool for mischief including extracting a budget quid pro quo. And: 3). End the exemption of the Alaska Legislature from the State open meeting laws except for very specific discussions of personal issues and like matters that apply to other agencies.

  3. Garand Fellow

    Jon K.

    I would guess that we are more dependent upon oil and state spending funded by oil today as a state than we were back then. That is, from an input-output standpoint the private sector today is smaller for our 700,000 people than it was back then for whatever the population was back then. So possibly this time the recession could be steeper as well as longer. However I am interested in your ideas.

    During the short, deep state recession of the late 1980’s driven by state spending reductions Alaska had a forest products industry that for the population of Alaska at the time was among the largest in the nation. There were two 600 tons-per-day pulp mills and several sawmills producing hundreds of millions of board feet per year (in total). The pulp was the highest value pulp produced anywhere in the world, and the pulp mills also produced significant amounts of chemicals for the manufacturing and food industries. The Ketchikan pulp mill had its own full-sized railroad within and surrounding the mill. There were over 70 logging camps, many employing over 100 people. Total direct employment varied from 4,000 to 6,000. The mills were high-wage (union), year-round jobs, and some of the logging camps were union.

    Today that industry is entirely gone. Adjusted for real world changes in the value of the dollar (real purchasing power for workers) there are no blue-collar jobs in Alaska today that are even close to comparable – not in mining or in the oil patch. For example, any of the higher paying jobs such as yarder engineer, shovel operator, mechanic or hooktender paid from $5,000 to $7,000 per month when a full-sized, 4WD pickup cost less than $3,500 at the dealers in Juneau and Ketchikan. Timber fallers sometimes earned even more. The lowest paid, entry level job – choker setter – paid $11.79 per hour, and for a 6 day week that amounted to about $4,000 per month.

    Additionally, the salmon industry in particular had much more value-added processing capacity during the period preceding that recession. There seemed to be a cannery in every other cove well into the late 1970’s and a little beyond. That has largely disappeared.

  4. Brad Keithley

    Jon … First preference, set the wayback machine, go back two years and have the legislature live up to the promises they made at the time about adopting sustainable budgets (which would have made the coming situation a whole lot easier). Second preference (in the event the wayback machine is out of order), step up to the plate and do it (go to sustainable budgets) now. This no longer is a question of whether Alaska can cut spending; with this nose dive in prices spending will be cut deeply (we simply will run out of money). The question is how deep. I, for one, will oppose tapping the Permanent Fund (earnings or principal) in an attempt to patch over the crisis. This generation made the problem; this generation should clean it up on their own dime and not simply to hand it on to the next (which would be yours).

  5. Lynn Willis

    I trust these are not the same “experts” that created the housing bubble in Alaska some of us have already experienced. Perhaps my views are provincial and lack the sophistication necessary to appreciate the actual sound fiscal situation the current legislature and Governor have created based on “facts on the ground today”; however, I bet the banker J.P. Morgan, 100 years ago, would have had trouble understanding how spending exceeding revenues today is not a serious problem if your collateral for current debt is only “hope” for future projects based on extraction of non-renewable resources to generate state revenues for future generations. I am not looking for a cliff Jon, but when hiking I can read a map and see one ahead and change my route to avoid falling off of it.

  6. Jon K

    Just to clarify – I’m not saying that mining will provide the state will sufficient revenue. It won’t. My point is that unlike in the 1980s, there is a decent chance that the private sector will keep chugging along.

  7. Garand Fellow

    I cannot completely agree with Lynn Willis here, and I am certain the Bill Walker I know is a real wing-nut, but I am sure that state government has in fact over-heated the economy – even using deficit spending – and now we must pay the piper. In that I guess I agree with Lynn Willis.

    While not near the 50th percentile of probability, I think it is possible that the economic downturn could be worse than that experienced in the late 1980s. Parnell would be a much better leader than we had at that time. Governor Cowper’s infamous all-bets-are-off speech, given to state employees on the 8th Floor of the SOB, told every department and every state employee that it was every man for himself (a dismal leadership performance from the man who beat Bill Sheffield in his own primary).

    Predictably, we then had a few years of economic chaos which ended only because Saddam Hussein quite unexpectedly (at least to me, and in my memory) invaded Kuwait which drove oil prices way up overnight. TAPS production was at about what turned out to be its all time high of course.

    Anyone who thinks that Bill Walker and Byron Mallot are equipped to handle this must already be very involved, as a consumer at least, in the marijuana industry. Take a look at what Sealaska shareholders have to say about that on their Facebook page. Those men are not leaders.

    Some of the projects listed by Jon K. may come to pass but even in the aggregate they cannot replace the state spending that must soon precipitously fall. Also, the mining industry cannot and should not be expected to supplant even the rounding error in declining petroleum revenues. I do not believe a pipeline bringing exportable quantities of NS natural gas to tidewater will be constructed within the lifetime of any adult.

    Jon K. is correct that Walker is telling different interest groups he will increase spending for them while he is saying he will balance the budget. The most likely circumstances to expect are that annual state spending will remain about the same (no matter who is elected) until all reserves but for the Permanent Fund are spent. At current oil prices that would take this current fiscal year plus two more. Then there would be some actual budget cuts, as opposed to the smoke and mirrors kind, while a debate rages.

    My guess is that some small number of years of honest program eliminations, possibly with the courts becoming a player, would be required before real solutions are considered. My definition of a real solution is one that makes all sides want to kill someone and/or themselves (and from time to time a solution can actually be accompanied by some of that), and one that follows a process that was so terrible that the solution will last because no one has the courage to begin a new process.

    Completely unexpected events can always change everything. China and the United States could go to war, and then normal economic concerns would fall by the way. Putin could invade Poland and Finland, and Alaska could become a staging area for the US part in that war. All cheerful thoughts.

  8. Jon K

    Brad – thanks for the link. Good post. But the big question remains unanswered, at least in your blog post, what would you suggest we do?

  9. Jon K

    Of course oil prices can fall. They can also rise. The conventional wisdom today is that they will stay in this price range for several years and then rise again. I have no idea what will happen, but if the “experts” are right, then we will continue to see lots of investment in Alaska and the private sector will remain strong.

    To draw meaningful lessons from history, you need to have an understanding of the facts on the ground today. My sense is that you decided long ago that we are headed off of a cliff and now you are looking to support that judgment.

  10. Lynn Willis

    You are motivated to directly spend that Permanent Fund balance aren’t you?
    Activity in the oil industry “dried up” because of low oil prices and can’t that happen again? Thanks for more advice to ignore the lessons of history, ignore the reality of today, and for even more assurance that if we just maintain the political status quo everything will be fine. I’m not buying it Jon.

  11. Lynn Willis

    AK Mom,
    Thanks for the tip of the hat. We should have at least been given a T-Shirt for our efforts to do the right thing. You are correct that the situation is not the same with residential housing supply; however, the basis for the crash was a false economy that could not sustain itself without state spending and I fear we are heading there again.
    I have mentioned my neighbor who makes a very good living as a construction worker moving between state and federal funded projects. How many Alaskans, even if not directly employed by the state, are now in a similar situation and dependent on state spending for their livelihood?
    Do you also remember the AHFC “ABE” (Alaska Building Equity) Loan program that had a 15 or 16 year payoff with ever increasing payment requirements after the first couple of years to allow for a shorter mortgage term. That was another “good idea” that hit folks just when the crisis was upon us. Not only were jobs being lost, but mortgage payments were increasing for many at the same time. I was the Condo Association President in my last year before I moved to Bethel and saw the disaster up close. Units would be abandoned and the utilities would be turned off. In the winter the pipes would freeze only to later burst and cause thousands of dollars in damages. The mortgage companies would not pay association dues on time nor be in any hurry to repair their damaged properties. I remember some people in foreclosure who were allowed to turn their home back to the bank instead of paying the remaining balance but then were hit with a huge federal tax bill because the IRS considered the “loan forgiveness” amount to be income for tax purposes. It was a mess……

  12. Jon K

    Lynn is failing to appreciate a couple of very important factors.

    1) In the 1980s we didn’t have over $60 billion in savings.

    2) During the crash, activity on the north slope and the Cook Inlet dried up. Today, activity in both basins is booming. $80 oil may delay some projects, but many remain economic. So while we may see a slow down if oil continues to fall, I don’t expect to see an exodus of companies leaving the state – ie private sector activity may soften, but we won’t be seeing mass lay offs like we did in the 1980s.

    4) there are some huge projects that will likely continue to move forward and will goose the economy in every corner of this state — AK LNG, Donlin mine, OCS development, Livengood Mine, Lik mine near Red Dog, new Cook Inlet liquefaction plant, the Ambler mining district, Niblack mine, Bokan mountain mine, etc etc — unless NARF, EPA, Trustees for Alaska, or other ENGOs don’t stop the projects through litigation or more 404c vetoes.

    4) Relatively low prices are forecasted for a year or two, and then prices are expected to rise again.

    5) These prices will clearly have a major impact on the state’s budget. The solution is to find new revenue sources – for some reason Lynn never considers that we have options given that we don’t pay a dime for state services, many industries are barely taxed, and the aforementioned $60 billion in savings. And we have to have the political will to actually start addressing the true causes of our growing budget: health care costs, pensions, and to a lesser extent too many dumb capital projects.

    One thing is certain – Bill Walker doesn’t have the temperament or judgment to figure it out. On the campaign trial he has said he wants to build more roads, extend the rail to more mines, apply the Cook Inlet incentive structure to the North Slope (this alone would add hundreds of billions to the budget), allow local governments to forego paying for education (another hundreds of millions), take a 51 percent stake in the LNG project (hundreds of millions), do more to address the energy crisis in rural Alaska (unclear what this will cost), spend more on education (not sure how much), expand Medicaid (is he really going to expand it for two years and then cut the program once the state has to pay?). If we take Walker at his word, he will try to dramatically increase the state’s budget.

    I actually support some of Bill’s proposals – but if the priority is creating a sustainable budget I don’t see how he gets there. And of course he will not tell us.

  13. akmom

    First a hat tip to Lynn. My husband and I bought our first house (zero lot line) about the same time. We, too, held on to it until we could sell it for the mortgage. We could have walked away and abandoned it but we hung in there. We sleep better knowing we did the right thing. So it is nice to see a fellow ’80s survivor did the same.

    But I think we are missing another piece of the puzzle here. Not only did oil prices drop but Anchorage had vastly overbilt commercial and residential properties at the time. Before we bought a home it was easy to find rentals for a reasonable price. That is definitely not the case today. I don’t think that the same conditions are present.

  14. Alex

    The fool, BillWalker, wants to add money to Medicaid, education and God only knows what else. He doesn’t have a clue.

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